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Optimal partnership contracts: Foundation and duality

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  • Harrison Cheng

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 two‐by‐two‐by‐two partnership games is offered. Such contracts implement an optimal strategy profile that either has no incentive cost to implement or is near a pure strategy profile.

Suggested Citation

  • Harrison Cheng, 2005. "Optimal partnership contracts: Foundation and duality," International Journal of Economic Theory, The International Society for Economic Theory, vol. 1(2), pages 111-130, June.
    • Handle: RePEc:bla:ijethy:v:1:y:2005:i:2:p:111-130
    DOI: 10.1111/j.1742-7363.2005.00008.x
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    1. Harrison Cheng, 2004. "Optimal Partnership Contracts: Foundation and Duality," IEPR Working Papers 05.11, Institute of Economic Policy Research (IEPR).
    2. Harrison Cheng, 2004. "Optimal Partnership Contracts: Foundation and Duality," KIER Working Papers 591, Kyoto University, Institute of Economic Research.
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