Motivating with simple contracts

Juan Escobar and Carlos Pulgar

International Journal of Industrial Organization, 2017, vol. 54, issue C, 192-214

Abstract: In practice, incentive schemes are rarely tailored to the specific characteristics of contracting parties. However, according to economic theory, optimal contracts should be highly dependent on individual conditions. We reconcile these observations in the context of a principal-agent model with both moral hazard and adverse selection. Motivating an agent could be increasingly costly to the principal because a more productive agent could also be more able to manipulate the terms of the contract. As a result, the principal may optimally pool some types by offering a contract with constant transfer and bonus. We also explore parameterizations where the optimal contract is fully separating but simple contracts attain a significant portion of the optimal welfare.

Keywords: Moral hazard; Adverse selection; Regulation; Simple contracts (search for similar items in EconPapers)
JEL-codes: D86 L22 L51 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167718716301825
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Motivating with Simple Contracts (2016)
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:eee:indorg:v:54:y:2017:i:c:p:192-214

DOI: 10.1016/j.ijindorg.2017.07.002

Access Statistics for this article

International Journal of Industrial Organization is currently edited by P. Bajari, B. Caillaud and N. Gandal

More articles in International Journal of Industrial Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().