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Dynamic contractual incentives in the face of a Samaritans’s dilemma

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  • Josepa Miquel-Florensa

Abstract

We design a project funding contract that provides optimal incentives to agents, in a setting where both principal and agent enjoy the benefits of the project in a non-rival form once completed but may differ in their valuation. To do so, we study optimal incentive payments in a dynamic principal-agent framework in which the principal cannot observe the agent’s investment, but only completed projects, and faces a Samaritan’s Dilemma: he cannot commit to terminate the contract before completion of the project. The agent decides whether to undertake a (discrete) investment or consume all received funds. We find that the optimal contract is stationary, and that either transfers equal to investment cost are incentive compatible or the cost of the contract is decreasing with the agent’s valuation of the projects. Given the intrinsic valuation of the project by the agent, he is always better off signing the contract in contraposition with the general moral hazard result. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Josepa Miquel-Florensa, 2013. "Dynamic contractual incentives in the face of a Samaritans’s dilemma," Theory and Decision, Springer, vol. 74(1), pages 151-166, January.
    • Handle: RePEc:kap:theord:v:74:y:2013:i:1:p:151-166
    DOI: 10.1007/s11238-012-9327-2
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    1. Spear, Stephen E. & Wang, Cheng, 2005. "When to fire a CEO: optimal termination in dynamic contracts," Journal of Economic Theory, Elsevier, vol. 120(2), pages 239-256, February.

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    More about this item

    Keywords

    Dynamic contracts; Moral hazard; Samaritan dilemma; D82; D86;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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