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Moral hazard with bounded payments

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  • Jewitt, Ian
  • Kadan, Ohad
  • Swinkels, Jeroen M.

Abstract

We 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.

Suggested Citation

  • Jewitt, Ian & Kadan, Ohad & Swinkels, Jeroen M., 2008. "Moral hazard with bounded payments," Journal of Economic Theory, Elsevier, vol. 143(1), pages 59-82, November.
    • Handle: RePEc:eee:jetheo:v:143:y:2008:i:1:p:59-82
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    References listed on IDEAS

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