Consumers solve many agency problems, by pointing out when they believe that agents have made mistakes. This paper considers the role that consumers play in inducing efficient behavior by agents. I distinguish between two case: those where consumers have similar preferences to the principal, and those where consumer preferences diverge from those of the principal. In the former case, allowing consumer feedback improves allocations, and increasing consumer information is unambiguously beneficial. In the case where consumers disagree with principals over desired outcomes, which characterizes many benefits given by the public sector, consumers feedback about the performance of agents can reduce welfare. This may result in efficiently restricting the ability of consumers to complain about agent performance.
*Published:
Prendergast, Canice. "Consumers And Agency Problems," Economic Journal, 2002, v112(478,Mar), C34-C51.
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