Compromises and Incentives

Sonia Di Giannatale and Itza T. Q. Curiel-Cabral

No DTE 559, Working Papers from CIDE, División de Economía

Abstract: We analyze a situation where a Principal does not necessarily have all the bargaining power while negotiating a contract with an Agent by studying a dynamic multi-objective moral hazard model with hidden action. We .nd that the structure of the optimal contracts change along the Pareto Frontier, and that compromise solutions implement higher Agent.s e¤ort levels when compared to contracts located at the Pareto Frontier.s extremes. Our numerical results indicate that in compromise solutions, compared to the contracts located at the Pareto Frontier.s extremes, the Agent exerts higher e¤ort levels, the Agent.s future compensation schedules show higher spread, and the Agent.s salaries become more directly related to productivity outcomes as time goes on. When the coe¢ cient of relative risk aversion increases, compromise solutions tend to become closer to the Agent.s most advan-tageous contract. Improvements in the .rm.s productivity environment bene.t, in relative terms, the Agent more than the Principal when compromise solutions are implemented.

Keywords: Asymmetric information; Principal-Agent Model; Incentives; Pareto Frontier; Compromise Solutions; Multi-Objective Problems; Evolutionary Algorithms (search for similar items in EconPapers)
JEL-codes: C63 C78 D61 D82 D86 L14 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2013-09
New Economics Papers: this item is included in nep-cmp, nep-hrm, nep-mic and nep-ore
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