Threshold Contracts

Hans Gersbach and Johannes Gerd Becker

No 11766, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We consider an infinitely repeated reappointment game in a principal-agent relationship and examine the consequences of threshold contracts, which forbid reappointment if the principal's utility is too low. Typical examples are voter-politician or government-public servant relationships. The agent chooses costly effort and enjoys being in office until s/he is deselected. The principal observes a noisy signal of the agent's effort and decides whether to reappoint the agent or not. We analyse the stationary Markovian equilibria of this game with and without threshold contracts. We identify the circumstances under which such threshold contracts are welfare-improving or beneficial for the principal, which, in turn, may justify attempts to introduce such contracts in politics.

Keywords: Principal-agent model; Repeated game; Reappointment; Stationary markovian strategies; Threshold strategies; Threshold contracts (search for similar items in EconPapers)
JEL-codes: C83 D82 D86 H11 (search for similar items in EconPapers)
Date: 2017-01
New Economics Papers: this item is included in nep-cta, nep-gth, nep-hpe and nep-mic
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Citations: View citations in EconPapers (1)

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