Comment on “Optimal Contract to Induce Continued Effort”

Ping Cao (), Feng Tian () and Peng Sun ()
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Ping Cao: International Institute of Finance, School of Management, University of Science and Technology of China, Hefei 230026, China
Feng Tian: The Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48105
Peng Sun: The Fuqua School of Business, Duke University, Durham, North Carolina 27708

Management Science, 2022, vol. 68, issue 1, 796-808

Abstract: In this comment, we first use a counterexample to demonstrate that the optimal contract structure proposed in section 4 of the paper [Sun P, Tian F (2018) Optimal contract to induce continued effort. Management Sci . 64(9):4193–4217] can be wrong when the two players’ discount rates are different. We then specify correct optimal contract structures, which involve generalizing the contract space to allow random termination. Numerical study with a wide range of model parameters illustrates that such a random termination only occurs sparingly in optimal contracts. Moreover, the suboptimality gap, measured by the relative improvement of the optimal contract over the best contract without random termination, is extremely small.

Keywords: dynamic; moral hazard; optimal control; jump process (search for similar items in EconPapers)
Date: 2022
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