Motivating versus Funding

Nicolas Querou, Antoine Soubeyran and Raphael Soubeyran

Working Papers from LAMETA, Universtiy of Montpellier

Abstract: We consider a moral hazard problem where the agent's effort induces monetary costs.In such a problem, limits on the agent's resource restrict his capability to exert effort (i.e., constrain his set of possible actions). We show that the optimal contract is, in some cases, a sharing contract and that the principal provides the agent with an up-front financial transfer. Moreover, whereas incentives and transfer to the agent are substitutes in the case where the agent has suficient wealth, they are complements when the agent's wealth is limited. It is also shown that, if the agent can consume some of his wealth at the outset of the contractual arrangement, he gets all the surplus of the relationship. We discuss the implications of our findings in a variety of settings, including venture capital, franchising, payments for environmental services and a current debate on wealth and cognitive functions.

Pages: 22 pages
Date: 2015-10, Revised 2015-10
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-hrm
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:lam:wpaper:15-11

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