Multi-period Contract Problems with Verifiable and Unverifiable Outputs

Kazuya Kamiya and Meg Sato
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Meg Sato: Crawford School of Economics & Government, The Australian National University

No CIRJE-F-800, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: Labour contracts tend to be more complicated than one simple short or long-term contract which is the basis of previous studies. Combinations of different length contracts become essential when principals expect to maximize not only verifiable outputs but also observable but unverifiable outputs, e.g., leadership. This paper is the first to develop a theoretical model of multi-period contracts that combine short-, mid-, and long-term contracts. We show that combinations of different length contracts vary by the relative importance of verifiable and unverifiable outputs and relative efficiency of investments in human capital made for each output. We also determine thresholds where the principal switches from offering one type of contract to the other.

Pages: 35 pages
Date: 2011-04
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http://www.cirje.e.u-tokyo.ac.jp/research/dp/2011/2011cf800.pdf (application/pdf)

Related works:
Working Paper: Multi-Period Contract Problems with Verifiable and Unverifiable Outputs (2011)
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