BIASED PRINCIPALS AS A DISCIPLINE DEVICE

This paper rationalizes the existence of multiple, biased principals a s a discipline device that induces agents to expend effort, Specifical ly, principals are given incentives that induce them to take actions t hat reward (punish) agents after good (bad) performance. This framewor k is illustrated in the case of corporations, which rely on equityhold ers and debtholders to keep management in check, and in the case of mu ltiministry oversight of state-owned firms.