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Mitigating Non-contractible actions by randomness

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Author Info
Roland Strausz ()

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Abstract

This paper studies non-contractibility of a contract designer's actions in an agency model with costly monitoring. It shows that non-contractibility may lead to an explicit randomness, which is not optimal under full contractibility. The randomness mitigates non-contractibility. Its effectiveness increases with the ex post deducibility of the non-contractible variable. Mitigation is perfect, if the non-contractible action can be deduced perfectly from other contractible variables. Consequently, non-contractibility is less severe than some recent literature indicates.

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Paper provided by Departmental Working Papers in its series Papers with number 003.

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Handle: RePEc:bef:lsbest:003

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Related research
Keywords: incomplete contracting; random signals; stochastic contracts; non-contractible monitoring;

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  1. Fahad Khalil, 1997. "Auditing Without Commitment," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 629-640, Winter. [Downloadable!] (restricted)
  2. Strausz, Roland, 1997. "Delegation of Monitoring in a Principal-Agent Relationship," Review of Economic Studies, Blackwell Publishing, vol. 64(3), pages 337-57, July. [Downloadable!] (restricted)
    Other versions:
  3. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  4. Border, Kim C & Sobel, Joel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Blackwell Publishing, vol. 54(4), pages 525-40, October. [Downloadable!] (restricted)
  5. Gjesdal, Froystein, 1982. "Information and Incentives: The Agency Information Problem," Review of Economic Studies, Blackwell Publishing, vol. 49(3), pages 373-90, July. [Downloadable!] (restricted)
  6. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May. [Downloadable!] (restricted)
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