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Dynamic Principal-Multiple Agent Contracts

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  • Sevin Yeltekin

    (Dept. of Economics, Stanford University)

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    Abstract

    I explore the nature of optimal static and dynamic contracts in an environment with moral hazard, where individuals contracting with the same principal receive correlated productivity shocks. The environment resembles the one considered in relative compensation theory ( i.e tournament theory), but extends this theory by solving for the optimal static and dynamic contracts in this setting. I compute and analyze \emph{independent} (each worker's compensation depends only on her output) and relative contracts (each worker's compensation depends on the xoutputs of all workers contracting with the same principal). Results imply that the optimal static relative contract is not substantially different from the optimal static independent contracts. However, the dynamic relative contract displays a strong a tournament feature; the contract gives the highest compensation to the worker who produces more than her counterparts and the lowest compensation to the least productive worker. I also characterize the stochastic processes for consumption and effort implied by dynamic contracts, and study the age-earnings profiles of the workers.

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    Bibliographic Info

    Paper provided by EconWPA in its series Computational Economics with number 9807001.

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    Length: 34 pages
    Date of creation: 18 Jul 1998
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    Handle: RePEc:wpa:wuwpco:9807001

    Note: Type of Document - PDF and PS; prepared on UNIX Solaris; to print on HP/PostScript/; pages: 34 ; figures: included.
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    Web page: http://128.118.178.162

    Related research

    Keywords: dynamic contracts; mechanism design; tournaments; lotteries;

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    1. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
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    Cited by:
    1. Edward S. Prescott, 1999. "A primer on moral-hazard models," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 47-78.

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