Contracting Under Unverifiable Monetary Costs

Nicolas Querou, Antoine Soubeyran and Raphael Soubeyran

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Abstract: We consider a contracting relationship where the agent's effort induces monetary costs, and limits on the agent's resource restrict his capability to exert effort. We show that, the principal finds it best to offer a sharing contract while providing the agent with an up-front financial transfer only when the monetary cost is neither too low nor too high. Thus, unlike in the limited liability literature, the principal might find it optimal to fund the agent. Moreover, both incentives and the amount of funding are non-monotonic functions of the monetary cost. These results suggest that an increase in the interest rate may affect the form of contracts differently , depending on the initial level of the former. Using the analysis, we provide and discuss several predictions and policy implications.

Keywords: contract theory; moral hazard; wealth constraint; funding (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-hrm and nep-mic
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Citations: View citations in EconPapers (6)

Published in Journal of Economics and Management Strategy, 2020, 29 (4), pp.892-909. ⟨10.1111/jems.12389⟩

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Journal Article: Contracting under unverifiable monetary costs (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02866383

DOI: 10.1111/jems.12389

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