Moral hazard with bounded payments

Ian Jewitt, Ohad Kadan and Jeroen M. Swinkels

Journal of Economic Theory, 2008, vol. 143, issue 1, pages 59-82

Abstract: We study the moral hazard problem with general upper and lower constraints M on compensation. We characterize the optimal contract and show existence and uniqueness. When minimizing costs for given effort, a principal harmed by M will pay according to M on some range of outcomes; when M reflects limited liability or a minimum wage, the contract is option-like. When the principal also chooses effort, a principal harmed by M might nonetheless never pay according to M. This cannot occur if the cost of inducing effort in the standard principal-agent problem is convex, for which we provide sufficient conditions related to the informativeness of outcome about effort.

Keywords: Principal-agent; models; Moral; hazard; Limited; liability; Compensation; Options; Duality (search for similar items in EconPapers)
Date: 2008
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Persistent link: http://EconPapers.repec.org/RePEc:eee:jetheo:v:143:y:2008:i:1:p:59-82

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