Robustness and Linear Contracts

Gabriel Carroll

American Economic Review, 2015, vol. 105, issue 2, 536-63

Abstract: We consider a moral hazard problem where the principal is uncertain as to what the agent can and cannot do: she knows some actions available to the agent, but other, unknown actions may also exist. The principal demands robustness, evaluating possible contracts by their worst-case performance, over unknown actions the agent might potentially take. The model assumes risk-neutrality and limited liability, and no other functional form assumptions. Very generally, the optimal contract is linear. The model thus offers a new explanation for linear contracts in practice. It also introduces a flexible modeling approach for moral hazard under nonquantifiable uncertainty. (JEL D81, D82, D86)

JEL-codes: D81 D82 D86 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/aer.20131159
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (150)

Downloads: (external link)
http://www.aeaweb.org/articles.php?doi=10.1257/aer.20131159 (application/pdf)
https://www.aeaweb.org/aer/ds/10502/20131159_ds.zip (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aecrev:v:105:y:2015:i:2:p:536-63

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

American Economic Review is currently edited by Esther Duflo

More articles in American Economic Review from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().