Contracting with Wealth-Constrained Agents

Tracy Lewis and David Sappington

International Economic Review, 2000, vol. 41, issue 3, 743-67

Abstract: We examine how a project owner optimally selects a project operator and motivates him to deliver an essential noncontractible input (e.g.. effort) when potential operators are privately informed about their limited wealth. Truthful revelation of wealth is induced by promising a higher probability of operation and, if necessary, a greater share of realized profit the larger the nonrefundable bond that a potential operator posts. The project owner benefits when total wealth is widely dispersed among potential operators. Under plausible conditions, limited knowledge of wealth is not constraining for the project owner. Copyright 2000 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 2000
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