Robust contracting under double moral hazard

Gabriel Carroll and Lukas Bolte

Theoretical Economics, 2023, vol. 18, issue 4

Abstract: We study contracting when both principal and agent have to exert noncontractible effort for production to take place. An analyst is uncertain about what actions are available and evaluates a contract by the expected payoffs it guarantees to each party in spite of the surrounding uncertainty. Both parties are risk-neutral; there is no limited liability. Linear contracts, which leave the agent with a constant share of output in exchange for a fixed fee, are optimal. This result holds both in a preliminary version of the model, where the principal only chooses to supply or not supply an input, and in several variants of a more general version, where the principal may have multiple choices of input. The model thus generates nontrivial linear sharing rules without relying on either limited liability or risk aversion.

Keywords: Uncertainty; asymmetric information; principal-agent model; linear contracts; double-sided moral hazard; robustness (search for similar items in EconPapers)
JEL-codes: D81 D82 D86 (search for similar items in EconPapers)
Date: 2023-11-09
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Citations: View citations in EconPapers (1)

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