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Multi-period Contract Problems with Verifiable and Unverifiable Outputs

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  • Kazuya Kamiya

    (Faculty of Economics, University of Tokyo)

  • Meg Sato

    (Crawford School of Economics & Government, The Australian National University)

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    Abstract

    Labour contracts tend to be more complicated than one simple short or long-term contract which is the basis of previous studies. Combinations of different length contracts become essential when principals expect to maximize not only verifiable outputs but also observable but unverifiable outputs, e.g., leadership. This paper is the first to develop a theoretical model of multi-period contracts that combine short-, mid-, and long-term contracts. We show that combinations of different length contracts vary by the relative importance of verifiable and unverifiable outputs and relative efficiency of investments in human capital made for each output. We also determine thresholds where the principal switches from offering one type of contract to the other.

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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2011/2011cf800.pdf
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    Bibliographic Info

    Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-800.

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    Length: 35 pages
    Date of creation: Apr 2011
    Date of revision:
    Handle: RePEc:tky:fseres:2011cf800

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    1. HOLMSTROM, Bengt, . "Moral hazard and observability," CORE Discussion Papers RP -379, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. James A. Mirrlees, 1976. "The Optimal Structure of Incentives and Authority Within an Organization," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 105-131, Spring.
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