On the Optimality of One-size-fits-all Contracts: The Limited Liability Case

Felipe Balmaceda ()

No 291, Documentos de Trabajo from Centro de Economía Aplicada, Universidad de Chile

Abstract: In this paper I study a multi-task principal agent model with a risk-neutral principal and a risk neutral agent subject to limited liability in an environment with adverse selection and moral hazard. The main results are as follows: (1) the optimal contracts in each possible case is a bonus-type contract that pays a bonus only when the highest signal is realized; (2) the informational rent as well as the limited liability rent are not independent; and (3) under moral and adverse selection the bonus contract exhibits a one-size-fits-all property; that is, in equilibrium all agents are offered the same contract. Under this contract more talented agents work harder and have a higher expected payoff and are on average more productive than less talented agents. This provides a rationale for the absence of menu of contracts in many different settings such as sales contracts, debt contracts, farming workers and optimal regulation. JEL-Classification: D82, D86, J33. Key words: Moral Hazard, Adverse Selection, Multiple Tasks, Limited Liability.

Date: 2012
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Related works:
Working Paper: On the Optimality of One-size-fits-all Contracts: The Limited Liability Case (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:edj:ceauch:291

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