Optimal Contracts with Shirking

John Zhu

The Review of Economic Studies, 2013, vol. 80, issue 2, 812-839

Abstract: I explicitly derive the optimal dynamic incentive contract in a standard continuous-time agency setting where the agent has a shirking action. My solution generates two dynamic contracts new to the literature. Both contracts include phases when the agent frequently shirks. In one contract, the shirking phases are relaxation periods rewarding the agent for good performance. In the other, the shirking phases are suspension-type arrangements punishing the agent for poor performance. In addition, I also explore the relationships between optimal contracting and taxes, bargaining, and renegotiation. Copyright 2013, Oxford University Press.

Date: 2013
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