Competition for Agency Contracts

Randolph McAfee and John McMillan

RAND Journal of Economics, 1987, vol. 18, issue 2, 296-307

Abstract: This article introduces a market for the services of agents into a principal-agent model. The principal and the potential agents are risk neutral. The contract trades off adverse selection against moral hazard. In a broad range of circumstances the optimal contract is linear in the outcome. In an incentive-compatible contract the more able is an agent, the larger is his contractual share of his marginal output; thus, a more able agent is induced to work at a rate closer to the first-best.

Date: 1987
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