When vagueness induces indirect competition: strategic incompleteness of contracts

Jaideep Roy and Konstantinos Serfes ()

Economic Theory, 2002, vol. 20, issue 3, 603-621

Abstract: A class of employment contracts entailing production targets and consequent rewards is studied. In a nondiscriminatory environment, a principal hiring many agents faces the problem of writing a common contract which induces the highest possible effort from each one of his agents. While a very high target may get the best out of highly skilled agents, low skilled ones tend to shirk. On the other hand, although low targets make every agent put positive effort, there are efficiency losses from the high skilled agents. Also, in such environments the principal often has better information regarding the skills of all his agents than what each agent has regarding the rest of the agents at work. We show that if skills of agents are sufficiently close, the informed principal earns strictly higher profits by offering incomplete contracts as against being specific, as incomplete contracts reduce flow of information and induce indirect competition amongst agents.

Keywords: Informed principal; Strategic vagueness; Information flow; Incomplete contracts. (search for similar items in EconPapers)
JEL-codes: D82 L14 (search for similar items in EconPapers)
Date: 2002-03-21
Note: Received: May 19, 2000; revised version: August 28, 2001
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.de/link/service/journals/00199/papers/2020003/20200603.pdf (application/pdf)
Access to the full text of the articles in this series is restricted

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:20:y:2002:i:3:p:603-621

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().