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Robust contracting under double moral hazard

Author

Listed:
  • Carroll, Gabriel

    (Department of Economics, University of Toronto)

  • Bolte, Lukas

    (Department of Economics, Stanford University)

Abstract

We study contracting when both principal and agent have to exert noncontractible effort for production to take place. An analyst is uncertain about what actions are available and evaluates a contract by the expected payoffs it guarantees to each party in spite of the surrounding uncertainty. Both parties are risk-neutral; there is no limited liability. Linear contracts, which leave the agent with a constant share of output in exchange for a fixed fee, are optimal. This result holds both in a preliminary version of the model, where the principal only chooses to supply or not supply an input, and in several variants of a more general version, where the principal may have multiple choices of input. The model thus generates nontrivial linear sharing rules without relying on either limited liability or risk aversion.

Suggested Citation

  • Carroll, Gabriel & Bolte, Lukas, 2023. "Robust contracting under double moral hazard," Theoretical Economics, Econometric Society, vol. 18(4), November.
    • Handle: RePEc:the:publsh:4916
    as

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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Uncertainty; asymmetric information; principal-agent model; linear contracts; double-sided moral hazard; robustness;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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