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Optimal Partnership Contracts: Foundation and Duality

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  • Harrison Cheng
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    Abstract

    We use the duality in linear programming to solve the problem of optimal contracts with moral hazards. We show the importance of allowing the partners to throw away outputs under some contingencies. A two-step procedure is used to find the optimal contracts. The first step minimizes the loss from undistributed outputs, and in the second step, a second best solution is found. A characterization of the optimal contracts in 2-by-2-by-2 partnership games is o?ered. Such contracts implement an optimal strategy profile which either has no incentive cost to implement or is near a pure strategy profile.

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    File URL: http://www.usc.edu/dept/LAS/economics/IEPR/Working%20Papers/IEPR_05.11_%5BCheng%5D.pdf
    File Function: First version, 2004
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    Bibliographic Info

    Paper provided by Institute of Economic Policy Research (IEPR) in its series IEPR Working Papers with number 05.11.

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    Length: 37 pages
    Date of creation: Aug 2004
    Date of revision:
    Handle: RePEc:scp:wpaper:05-11

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    Keywords: optimal sharing contracts; partnership games; moral hazards; duality; linear programming;

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