Mechanism Design for Designs: Principals with Good (and bad) Taste

This paper considers a moral hazard problem where a principal contracts with one or more agents to produce a design. The design refers to something whose value is subjective, may or may not be well understood by the principal, and can be returned if the principal deems it to have low value, which is sometimes called right of refusal. Correlation of the principal's signal with the his true value plays a role, in contrast to standard principal agent problem; experience goods are di erent from credence goods. The principal's ability to forecast value corresponds to a notion of taste for the principal that distinguishes taste from judgment. This measure of informativeness of the signal matters for many features of the contract design: the total cost, the number of agents contracted with, and the choice of agent quality. This measure of informativeness is related to subjectivity, and shows that privateness of the signal, which has been used synonymously with subjectivity in the literature, does not fully describe subjectivity. For examples where the subjectivity comes through the taste rather than lack of judgment, uncertainty in the outcome may make the incentive contract less costly, in contrast to both the canonical model of moral hazard and the case where signals are private but not necessarily truly subjective. ∗University of Toronto. Thanks to Heski Bar-Isaac, Jim Campbell, Rahul Deb, Marcin Peski, and the Toronto Theory and IO Bag Lunches for comments.