Moral hazard with bounded payments
AbstractWe study the moral hazard problem with general upper and lower constraints M on compensation. We characterize the optimal contract and show existence and uniqueness. When minimizing costs for given effort, a principal harmed by M will pay according to M on some range of outcomes; when M reflects limited liability or a minimum wage, the contract is option-like. When the principal also chooses effort, a principal harmed by M might nonetheless never pay according to M. This cannot occur if the cost of inducing effort in the standard principal-agent problem is convex, for which we provide sufficient conditions related to the informativeness of outcome about effort.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Theory.
Volume (Year): 143 (2008)
Issue (Month): 1 (November)
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Web page: http://www.elsevier.com/locate/inca/622869
Principal-agent models Moral hazard Limited liability Compensation Options Duality;
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