Optimality of linearity with collusion and renegotiation

Mehmet Barlo () and Özdog˜an, Ayça

Mathematical Social Sciences, 2014, vol. 71, issue C, 46-52

Abstract: This study analyzes a continuous-time N-agent Brownian moral hazard model with constant absolute risk aversion (CARA) utilities, in which agents’ actions jointly determine the mean and variance of the outcome process. In order to give a theoretical justification for the use of linear contracts, as in Holmstrom and Milgrom (1987), we consider a variant of its generalization given by Sung (1995), into which collusion and renegotiation possibilities among agents are incorporated. In this model, we prove that there exists a linear and stationary optimal compensation scheme which is also immune to collusion and renegotiation.

Date: 2014
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Working Paper: Optimality of linearity with collusion and renegotiation (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:matsoc:v:71:y:2014:i:c:p:46-52

DOI: 10.1016/j.mathsocsci.2014.04.004

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