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Incentive Contracting Under Limited Liability

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  • Eun‐Soo Park

Abstract

We examine the nature of incentive schemes between the principal and the risk‐neutral agent in the presence of the agent's limited liability and ex ante action choice. We consider alternative schemes when a simple rental contract is infeasible due to the limited liability of the agent and study the effectiveness of a performance bonus scheme in achieving the first‐best outcome. We also discuss some implications of such schemes in real practices.

Suggested Citation

  • Eun‐Soo Park, 1995. "Incentive Contracting Under Limited Liability," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 477-490, September.
    • Handle: RePEc:bla:jemstr:v:4:y:1995:i:3:p:477-490
    DOI: 10.1111/j.1430-9134.1995.00477.x
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    References listed on IDEAS

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    1. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
    2. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
    3. Sobel, Joel, 1993. "Information Control in the Principal-Agent Problem," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 259-269, May.
    4. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, vol. 20(2), pages 231-259, April.
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