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Limited Liability and Bonus Contracts

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Author Info
Son Ku Kim
Abstract

This paper studies the nature of incentive contracts between a risk-neutral principal and a risk-neutral agent under the constraint that the agent's liability is limited. A necessary and sufficient condition is derived for the existence of a first-best contract under this constraint, and a bonus-based contract is shown to be the most efficient contractual form. Implications of bonus contracts are also discussed. Copyright (c) 1997 Massachusetts Institute of Technology.

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Article provided by Blackwell Publishing in its journal Journal of Economics & Management Strategy.

Volume (Year): 6 (1997)
Issue (Month): 4 (December)
Pages: 899-913
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Handle: RePEc:bla:jemstr:v:6:y:1997:i:4:p:899-913

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  1. Jacques Lawarree & Marc van Audenrode, 2000. "Moral Hazard and Limited Liability," Econometric Society World Congress 2000 Contributed Papers 0971, Econometric Society. [Downloadable!]
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