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Incentives and Standards in Agency Contracts

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  • ROBERT G. CHAMBERS
  • JOHN QUIGGIN

Abstract

This paper studies the structure of state‐contingent contracts in the presence of moral hazard and multitasking. Necessary and sufficient conditions for the presence of multitasking to lead to fixed payments instead of incentive schemes are identified. It is shown that the primary determinant of whether multitasking leads to higher or lower powered incentives is the role that noncontractible outputs play in helping the agent deal with the production risk associated with the observable and contractible outputs. When the noncontractible outputs are risk substitutes and are socially undesirable, standards are never optimal. If the noncontractible outputs are socially desirable, standards are never optimal if the noncontractible outputs play a risk‐complementary role.

Suggested Citation

  • Robert G. Chambers & John Quiggin, 2005. "Incentives and Standards in Agency Contracts," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(2), pages 201-228, May.
    • Handle: RePEc:bla:jpbect:v:7:y:2005:i:2:p:201-228
    DOI: 10.1111/j.1467-9779.2005.00201.x
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    References listed on IDEAS

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    1. Chambers,Robert G. & Quiggin,John, 2000. "Uncertainty, Production, Choice, and Agency," Cambridge Books, Cambridge University Press, number 9780521622448.
    2. Chambers,Robert G., 1988. "Applied Production Analysis," Cambridge Books, Cambridge University Press, number 9780521314275.
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    Cited by:

    1. Maurice J.G. Bun & Leo Huberts, 2016. "The impact of performance pay on sales and fundraising," UvA-Econometrics Working Papers 16-01, Universiteit van Amsterdam, Dept. of Econometrics.
    2. Robert G. Chambers & Tigran A. Melkonyan, 2010. "Regulatory Policy Design in an Uncertain World," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(6), pages 1081-1107, December.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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