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Penalizing Success in Dynamic Incentive Contracts: No. Good Deed Goes Unpunished?

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  • Tracy Lewis
  • David E.M. Sappington

Abstract

We examine optimal dynamic incentive contracts when adverse selection and moral hazard problems are present. We find that early success is optimally penalized in the sense that the agent who succeeds early subsequently faces a lower-powered incentive contract. Penalizing success in this manner serves to limit the agent's initial incentive to understate his ability.

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File URL: http://links.jstor.org/sici?sici=0741-6261%28199722%2928%3A2%3C346%3APSIDIC%3E2.0.CO%3B2-9&origin=repec
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Bibliographic Info

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

Volume (Year): 28 (1997)
Issue (Month): 2 (Summer)
Pages: 346-358

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Handle: RePEc:rje:randje:v:28:y:1997:i:summer:p:346-358

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Cited by:
  1. Anyangah, Joshua Okeyo, 2010. "Financing investment in environmentally sound technologies: Foreign direct investment versus foreign debt finance," Resource and Energy Economics, Elsevier, vol. 32(3), pages 456-475, August.

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