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Competition for Agency Contracts

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  • R. Preston McAfee
  • John McMillan

Abstract

This article introduces a market for the services of agents into a principal-agent model. The principal and the potential agents are risk neutral. The contract trades off adverse selection against moral hazard. In a broad range of circumstances the optimal contract is linear in the outcome. In an incentive-compatible contract the more able is an agent, the larger is his contractual share of his marginal output; thus, a more able agent is induced to work at a rate closer to the first-best.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 18 (1987)
Issue (Month): 2 (Summer)
Pages: 296-307

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Handle: RePEc:rje:randje:v:18:y:1987:i:summer:p:296-307

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