Incentives in Principal-Agent Relationships

This article identifies some of the major issues that have been examined in the literature on incentives. The article begins by discussing the frictions that lie at the heart of incentive problems. Next, the principal's optimal response to these frictions is explored, taking as given the characteristics of the agents with whom the principal interacts in a nonrepeated setting. The design of individualized contracts, contests, and tournaments is analyzed. Then, the principal's task of selecting the best agent is addressed, and repeated agency relationships are considered.