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Optimal linear contracts with heterogeneous agents

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  • Armando Levy
  • Tomislav Vukina
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    Abstract

    This paper examines the class of linear contracts in a simple principal--agent model in which agents are heterogeneous in their abilities to perform a task for the principal. We show that in the absence of transaction costs, the optimal linear contract is a set of individualised contracts. The fact that individualised contracts are rarely observed may be explained by the presence of transaction costs. The equilibrium that emerges depends on the costs of screening relative to the heterogeneity in agents' abilities. In the monopsony case, the dynamic incentives of the agents preclude individualised contracts even if transaction costs are not significant. Copyright 2002, Oxford University Press.

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    Bibliographic Info

    Article provided by Foundation for the European Review of Agricultural Economics in its journal European Review of Agricultural Economics.

    Volume (Year): 29 (2002)
    Issue (Month): 2 (June)
    Pages: 205-217

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    Handle: RePEc:oup:erevae:v:29:y:2002:i:2:p:205-217

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    Cited by:
    1. Golman, Russell & Bhatia, Sudeep, 2012. "Performance evaluation inflation and compression," Accounting, Organizations and Society, Elsevier, vol. 37(8), pages 534-543.
    2. Wang, Yanguo & Jaenicke, Edward C., 2005. "Pooling, Separating, and Cream-Skimming In Relative-Performance Contracts," 2005 Annual meeting, July 24-27, Providence, RI 19522, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Vukina, Tomislav & Zheng, Xiaoyong, 2006. "Structural Estimation of Rank-Order Tournament Games with Private Information," 2006 Annual meeting, July 23-26, Long Beach, CA 21059, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Koch, Alexander K. & Peyrache, Eloïc, 2008. "Moral hazard contracts: Does one size fit all?," Economics Letters, Elsevier, vol. 100(3), pages 399-401, September.
    5. Zheng, Xiaoyong & Vukina, Tomislav, 2007. "Efficiency gains from organizational innovation: Comparing ordinal and cardinal tournament games in broiler contracts," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 843-859, August.
    6. Dubois, Pierre & Vukina, Tomislav, 2008. "Optimal Incentives under Moral Hazard and Heterogeneous Agents: Evidence from Production Contracts Data," IDEI Working Papers 393, Institut d'Économie Industrielle (IDEI), Toulouse.
    7. Vukina, Tomislav & Zheng, Xiaoyong, 2008. "Homogenous and Heterogenous Contestants in Piece Rate Tournaments: Theory and Empirical Analysis," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6540, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Niladri Syam & James Hess & Ying Yang, 2013. "Sales contests versus quotas with imbalanced territories," Marketing Letters, Springer, vol. 24(3), pages 229-244, September.
    9. Wang, Yanguo & Jaenicke, Edward C., 2004. "Static And Dynamic Efficiency Of Pooled Broiler Contracts: Relative-Performance Contracts Vs. Fixed-Performance Contracts," 2004 Annual meeting, August 1-4, Denver, CO 20406, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    10. Wang, Yanguo & Jaenicke, Edward C., 2005. "Pooling, Separating, and Cream-Skimming In Relative-Performance Contracts," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24639, European Association of Agricultural Economists.

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