incentive contract

hello, guys, what i wanna talk here is about the use of incentive contract.

as all of us know that we wanna have a so called homarnized socity, but the fact is that it is difficult to achieve this goal. here, i wanna talk about the reason why it is not easy to get what we wanna get.

I think the most suitable model to explain this is the so called agenct-principle theory. according to this theory, the above problem arise because of two facts. the first one is that the  principle who owns the capital and other social resorces do not work by himself,but hire another person (we call this kind of person as agent) to work. in another word, i should say the principle bear the major changes of the all resources of the entity caused by the act of the agent. another very important fact is that the principle can not mornitor the act of the agent.

so if one of the above two facts do not exist, then, the agent-principle problem does not exist and all of the incentive problems will be solved. what we observed in the real world is that there are many the serious incentive problems.

someone may say ,why do not let the principle to work by himself, then there will be no incentive problem. that is a good point, but the fact is that the principle neither have no the specific know how nor have the time and enery to deal all of things espcially when the firm is very big.

that is why, we say the agent-pinciple problem quite often and normal in the real world.

 actually,dut to the reasons we talked about, it is impossible to achieve the so called the first best incentive contract.it means we must use performance measures to evaluate the performance of the agent.

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