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A Theory of Threshold Contracts

Johannes Gerd Becker () and Hans Gersbach ()
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Johannes Gerd Becker: ZHAW, Switzerland, http://www.zhaw.ch/

No 13/182, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: We consider an in nitely repeated reappointment game in a principal- agent relationship. Typical examples are voter-politician or government- public servant relationships. The agent chooses costly effort and enjoys being in office until he is deselected. The principal observes a noisy signal of the agent's effort and decides whether to reappoint the agent or not. We analyse the stationary Markovian equilibria of this game and examine the consequences of threshold contracts, which forbid reappointment if the principal's utility is too low. We identify the circumstances under which such threshold contracts are welfare-improving or beneficial for the principal.

Keywords: principal-agent model; repeated game; reappointment; stationary Markovian strategies; threshold strategies; threshold contracts, asymmetric information; commitment. (search for similar items in EconPapers)
JEL-codes: C83 D82 D86 H11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-hrm, nep-mic and nep-reg
Date: 2013-10
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