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Optimal Partnership Contracts: Foundation and Duality

Harrison Cheng

No 05.11, IEPR Working Papers from Institute of Economic Policy Research (IEPR)

Abstract: We use the duality in linear programming to solve the problem of optimal contracts with moral hazards. We show the importance of allowing the partners to throw away outputs under some contingencies. A two-step procedure is used to find the optimal contracts. The first step minimizes the loss from undistributed outputs, and in the second step, a second best solution is found. A characterization of the optimal contracts in 2-by-2-by-2 partnership games is o?ered. Such contracts implement an optimal strategy profile which either has no incentive cost to implement or is near a pure strategy profile.

Keywords: optimal sharing contracts; partnership games; moral hazards; duality; linear programming (search for similar items in EconPapers)
JEL-codes: D23 D8 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-mic
Date: 2004-08
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Persistent link: https://EconPapers.repec.org/RePEc:scp:wpaper:05-11

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