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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. Elisabetta Iossa & David Martimort, 2008. "The Simple Micro-Economics of Public-Private Partnerships," CEIS Research Paper 139, Tor Vergata University, CEIS, revised 15 Feb 2013.
  2. Auray, Stéphane & Mariotti, Thomas & Moizeau, Fabien, 2007. "Dynamic Regulation of Quality," IDEI Working Papers 397, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. MOIZEAU, Fabien & MARIOTTI, Thomas & AURAY, Stéphane, 2007. "Dynamic Regulation of Public Good Quality," 2007 Meeting Papers 335, Society for Economic Dynamics.

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