Related Experiment Video
Updated: Oct 22, 2025
05:30
Large Scale Energy Efficient Sensor Network Routing Using a Quantum Processor Unit
Published on: September 8, 2023
849
Agency Contracts under Maximum-Entropy
Oscar Gutiérrez1, Vicente Salas-Fumás2
1Department of Business Economics, Universitat Autònoma de Barcelona, 08193 Barcelona, Spain.
Entropy (Basel, Switzerland)
|August 27, 2021
Summary
This study applies the maximum-entropy principle (MEP) to agency contracting with incomplete information. It finds that optimal contracts often resemble simple, increasing affine functions of output, reflecting real-world compensation schemes.
Area of Science:
- Economics
- Decision Theory
- Information Theory
Background:
- Agency contracting involves principals and agents with potentially misaligned goals.
- Information asymmetry regarding output probabilities complicates contract design.
- Existing models often assume complete knowledge of output distributions.
Purpose of the Study:
- To apply the maximum-entropy principle (MEP) to agency contracting under partial information.
- To characterize second-best agency contracts derived from maximum entropy distributions (MED).
- To explore how information availability influences optimal contract structures.
Main Methods:
- Application of the maximum-entropy principle (MEP) to model agency relationships.
- Derivation of maximum entropy distributions (MED) consistent with available information.
- Characterization of second-best agency contracts based on MED.
Main Results:
- Under minimal shared information, the second-best contract is an increasing affine function of output.
- Increased information about output distributions can lead to more complex optimal contracts.
- The MEP framework theoretically supports observed real-world compensation schemes.
Conclusions:
- The MEP provides a robust framework for designing agency contracts with incomplete information.
- Simple, output-based compensation is optimal under limited information, aligning with practical scenarios.
- The model's flexibility allows for complex contracts when more data is available.
Related Concept Videos
01:20Entropy and the Second Law of Thermodynamics
3.4K
The second law of thermodynamics can be stated quantitatively using the concept of entropy. Entropy is the measure of disorder of the system.
The relation between entropy and disorder can be illustrated with the example of the phase change of ice to water. In ice, the molecules are located at specific sites giving a solid state, whereas, in a liquid form, these molecules are much freer to move. The molecular arrangement has therefore become more randomized. Although the change in average...
The relation between entropy and disorder can be illustrated with the example of the phase change of ice to water. In ice, the molecules are located at specific sites giving a solid state, whereas, in a liquid form, these molecules are much freer to move. The molecular arrangement has therefore become more randomized. Although the change in average...
3.4K
02:38Third Law of Thermodynamics
20.1K
A pure, perfectly crystalline solid possessing no kinetic energy (that is, at a temperature of absolute zero, 0 K) may be described by a single microstate, as its purity, perfect crystallinity,and complete lack of motion means there is but one possible location for each identical atom or molecule comprising the crystal (W = 1). According to the Boltzmann equation, the entropy of this system is zero.
20.1K
03:00Standard Entropy Change for a Reaction
22.0K
Entropy is a state function, so the standard entropy change for a chemical reaction (ΔS°rxn) can be calculated from the difference in standard entropy between the products and the reactants.
22.0K
02:05Entropy and Solvation
7.5K
The process of surrounding a solute with solvent is called solvation. It involves evenly distributing the solute within the solvent. The rule of thumb for determining a solvent for a given compound is that like dissolves like. A good solvent has molecular characteristics similar to those of the compound to be dissolved. For example, polar solutions dissolve polar solutes, and apolar solvents dissolve apolar solutes. A polar solvent is a solvent that has a high dielectric constant (ϵ...
7.5K
01:10Entropy Change in Reversible Processes
2.8K
In the Carnot engine, which achieves the maximum efficiency between two reservoirs of fixed temperatures, the total change in entropy is zero. The observation can be generalized by considering any reversible cyclic process consisting of many Carnot cycles. Thus, it can be stated that the total entropy change of any ideal reversible cycle is zero.
The statement can be further generalized to prove that entropy is a state function. Take a cyclic process between any two points on a p-V diagram.
The statement can be further generalized to prove that entropy is a state function. Take a cyclic process between any two points on a p-V diagram.
2.8K
01:14The Second Law of Thermodynamics
6.1K
In the quest to identify a property that may reliably predict the spontaneity of a process, a promising candidate has been identified: entropy. Scientists refer to the measure of randomness or disorder within a system as entropy. High entropy means high disorder and low energy. To better understand entropy, think of a student’s bedroom. If no energy or work were put into it, the room would quickly become messy. It would exist in a very disordered state, one of high entropy. Energy must be...
6.1K