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Dynamic Principal-Multiple Agent Contracts

Author

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  • Sevin Yeltekin

    (Dept. of Economics, Stanford University)

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.

Suggested Citation

  • Sevin Yeltekin, 1998. "Dynamic Principal-Multiple Agent Contracts," Computational Economics 9807001, University Library of Munich, Germany.
    • 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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    References listed on IDEAS

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    1. Stephen E. Spear & Sanjay Srivastava, 1987. "On Repeated Moral Hazard with Discounting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(4), pages 599-617.
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    Cited by:

    1. Edward Simpson Prescott, 1999. "A primer on moral-hazard models," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 47-78.

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    More about this item

    Keywords

    dynamic contracts; mechanism design; tournaments; lotteries;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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