Asymmetric Information (2): Lottery Mechanism

In business or daily practices, the existence of asymmtric information may cause the unachievable targeted objectives (goals). For example, a team work consisted four persons is assigned to produce twelve units of output. On the average, every one in a team has to contribute three units to achieve the targeted goal. However, at the end of the day, the targeted output is unsatisfied. The team has only eleven output. Since all team members were working together in a group, no one can identify who was not contibuting best effort in the team. Every one in the team is not a supervisor of others so that they can not monitor and evaluate each other.

In this kind of situation, one team member or more may work at a lower than the required effort. This person(s) pretended to work well as if he or she is a good team member. Unfortunately, it is not very easy for the team to find who is the free rider in the group. However, it does not mean that this situation can not be resolved.

One of the way to overcome this agency problem is lottery mechanism. The team members may use this mechanism to point who should bear the penalty of being under-performance. The lottery mechanism is simply putting all names of  team member in a small folded paper (like the one usually do in “arisan”). Then, this paper is inserted into a bottle. Any one can be randomly be selected as the one bears the penalty when his or her name is coming out of the bottle.

This mechanism has a drawback. It does not consider whether the one selected during its application is the right person. It may result in pointing a wrong person to be punished. However, if this mechanism is agreed before the works or jobs to be done, any one in the team will put the best effort so that the targeted level of output is attained. Therefore, the problem of finding the one to be punished will not appear.

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