Endogenous Verifiability and Optimality in Agency: A non-contingent approach

Manuel Willington and Roy Costilla ()

ILADES-UAH Working Papers from Universidad Alberto Hurtado/School of Economics and Business

Abstract: In the context of a principal-agent model where verification of an agent’s effort is endogenously determined through strategic interactions between contracting parties, we derive a necessary and suficient condition to achieve the first best with a non-contingent or incomplete contract. These conditions relate the Principal’s benefit, the Agent’s cost, the probability of winning and the cost of litigation. Also, these conditions are found to be more general than the ones established in Ishiguro (2002) within a similar setup.

Keywords: incomplete contracts; endogenous verifiability; expectation damages. (search for similar items in EconPapers)
JEL-codes: D20 D86 K41 M52 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2007-09
New Economics Papers: this item is included in nep-bec, nep-cta and nep-law
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