A Note on the Dynamics of Incentive Contracts
AbstractLaffont and Tirole  show that when the uncertainty about the agent's ability is small, the equilibrium must involve a large amount of pooling, but it is not necessary to be a partition equilibrium. They construct a nonpartition continuation equilibrium for a given first-period menu of contracts and conjecture that this continuation equilibrium need not be suboptimal for the whole game under small uncertainty. We show that, irrespective of the amount of uncertainty, this nonpartition continuation equilibrium generates a smaller payoff for the principal than a different menu of contracts with a partition continuation equilibrium. In this sense, Laffont and Tirole's menu of contracts, giving rise to a nonpartition continuation equilibrium, is not optimal. An intuition behind this result is provided that may shed some light on the problem of dynamic contracting without commitment.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 9813.
Date of creation: Aug 2007
Date of revision: Feb 2008
Incentive Contracts; Dynamic Contracting; Commitment; Partition Equilibrium; Ratchet Effect; Bunching;
Other versions of this item:
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-08-14 (All new papers)
- NEP-BEC-2008-08-14 (Business Economics)
- NEP-CTA-2008-08-14 (Contract Theory & Applications)
- NEP-MIC-2008-08-14 (Microeconomics)
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.:
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- Schilizzi, Steven & Breustedt, Gunnar & Latacz-Lohmann, Uwe, 2010. "Should we combine incentive payments and tendering for efficiently purchasing conservation services from landholders?," 2010 Conference (54th), February 10-12, 2010, Adelaide, Australia 59159, Australian Agricultural and Resource Economics Society.
- Latacz-Lohmann, Uwe & Schilizzi, Steven & Breustedt, Gunnar, 2011. "Auctioning Outcome-Based Conservation Contracts," 51st Annual Conference, Halle, Germany, September 28-30, 2011 114523, German Association of Agricultural Economists (GEWISOLA).
- Schilizzi, Steven & Breustedt, Gunnar & Latacz-Lohmann, Uwe, 2011. "Does tendering conservation contracts with performance payments generate additional benefits?," Working Papers 100883, University of Western Australia, School of Agricultural and Resource Economics.
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