A Theory of Threshold Contracts
AbstractWe consider an in nitely repeated reappointment game in a principal- agent relationship. Typical examples are voter-politician or government- public servant relationships. The agent chooses costly effort and enjoys being in office until he is deselected. The principal observes a noisy signal of the agent's effort and decides whether to reappoint the agent or not. We analyse the stationary Markovian equilibria of this game and examine the consequences of threshold contracts, which forbid reappointment if the principal's utility is too low. We identify the circumstances under which such threshold contracts are welfare-improving or beneficial for the principal.
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Bibliographic InfoPaper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 13/182.
Length: 62 pages
Date of creation: Oct 2013
Date of revision:
principal-agent model; repeated game; reappointment; stationary Markovian strategies; threshold strategies; threshold contracts; asymmetric information; commitment.;
Find related papers by JEL classification:
- C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-18 (All new papers)
- NEP-CTA-2013-10-18 (Contract Theory & Applications)
- NEP-HRM-2013-10-18 (Human Capital & Human Resource Management)
- NEP-MIC-2013-10-18 (Microeconomics)
- NEP-REG-2013-10-18 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, vol. 50(1), pages 5-25, January.
- Gersbach, Hans & Liessem, Verena, 2005.
"Re-election Threshold Contracts in Politics,"
CEPR Discussion Papers
5175, C.E.P.R. Discussion Papers.
- Gersbach, Hans, 2008.
CEPR Discussion Papers
6763, C.E.P.R. Discussion Papers.
- Patrick Bolton & Mathias Dewatripont, 2005.
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262025760, December.
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