Optimal contracts in a dynamic costly state verification model
AbstractThis paper describes optimal contracts in a dynamic costly state verification model with stochastic monitoring. An agent operates a risky project on behalf of a principal who can observe the project’s revenues at a cost. We show that an optimal contract exists such that, at any history, either the principal claims the project’s entire revenues or promises to claim nothing in the future. In particular, the agent’s expected income rises with time. Moreover, except in at most one period, the principal claims all revenues when audit occurs. We provide conditions under which all optimal contracts satisfy these properties. Copyright Springer-Verlag Berlin/Heidelberg 2005
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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 26 (2005)
Issue (Month): 4 (November)
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Web page: http://link.springer.de/link/service/journals/00199/index.htm
Other versions of this item:
- Monnet, Cyril & Quintin, Erwan, 2002. "Optimal contracts in a dynamic costly state verification model," Working Paper Series 0126, European Central Bank.
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
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