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When vagueness induces indirect competition: strategic incompleteness of contracts

Author

Listed:
  • Jaideep Roy

    (Department of Economics, Trinity College Dublin, Dublin 2, IRELAND)

  • Konstantinos Serfes

    (Department of Economics, SUNY at Stony Brook, Stony Brook, NY 11794-4384, USA)

Abstract

A class of employment contracts entailing production targets and consequent rewards is studied. In a nondiscriminatory environment, a principal hiring many agents faces the problem of writing a common contract which induces the highest possible effort from each one of his agents. While a very high target may get the best out of highly skilled agents, low skilled ones tend to shirk. On the other hand, although low targets make every agent put positive effort, there are efficiency losses from the high skilled agents. Also, in such environments the principal often has better information regarding the skills of all his agents than what each agent has regarding the rest of the agents at work. We show that if skills of agents are sufficiently close, the informed principal earns strictly higher profits by offering incomplete contracts as against being specific, as incomplete contracts reduce flow of information and induce indirect competition amongst agents.

Suggested Citation

  • Jaideep Roy & Konstantinos Serfes, 2002. "When vagueness induces indirect competition: strategic incompleteness of contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 20(3), pages 603-621.
    • Handle: RePEc:spr:joecth:v:20:y:2002:i:3:p:603-621
    Note: Received: May 19, 2000; revised version: August 28, 2001
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    Citations

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    Cited by:

    1. Marina Fiedler & Carolin Blank & Arnold Picot, 2010. "Antecedents of Intentionally Incomplete Inter-Firm Contracts," Schmalenbach Journal of Business Research, Springer, vol. 62(62), pages 133-157, January.

    More about this item

    Keywords

    Informed principal; Strategic vagueness; Information flow; Incomplete contracts.;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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