The Interaction of Implicit and Explicit Contracts in Repeated Agency

David G. Pearce and Ennio Stacchetti
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David G. Pearce: Cowles Foundation, Yale University, https://cowles.yale.edu/
Ennio Stacchetti: Stanford University

No 892, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Traditional agency theory assumes that the principal has no more information about the agent's actions than the enforcement authorities have. This is unrealistic in many settings, and in repeated models, additional information possessed by the principal changes the nature of the problem. Such information can be used in implicit, self-enforcing contracts between principal and agent, that supplement the usual explicit contracts. This paper studies the way in which the two kinds of contracts are combined in constrained efficient equilibria of the agency supergame. The agent's compensation is comprised of both guaranteed payments and voluntary bonuses from the principal. We give a simple characterization of the composition of remuneration in the optimal dynamic scheme.

Keywords: Principal-agent theory; contracts; supergames; dynamic models (search for similar items in EconPapers)
Pages: 30 pages
Date: 1988-12
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Citations: View citations in EconPapers (1)

Published in Games and Economic Behavior (April 1998), 23(1): 75-96

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