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Fixed Wages and Bonuses in Agency Contracts: The Case of a Continuous State Space

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  • MARIA RACIONERO
  • JOHN QUIGGIN

Abstract

In this paper, we extend the state‐contingent production approach to principal–agent problems to the case where the state space is an atomless continuum. The approach is modelled on the treatment of optimal tax problems. The central observation is that, under reasonable conditions, the optimal contract may involve a fixed wage with a bonus for above‐normal performance. This is analogous to the phenomenon of “bunching” at the bottom in the optimal tax literature.

Suggested Citation

  • Maria Racionero & John Quiggin, 2006. "Fixed Wages and Bonuses in Agency Contracts: The Case of a Continuous State Space," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(5), pages 761-777, December.
    • Handle: RePEc:bla:jpbect:v:8:y:2006:i:5:p:761-777
    DOI: 10.1111/j.1467-9779.2006.00287.x
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    1. Chambers,Robert G. & Quiggin,John, 2000. "Uncertainty, Production, Choice, and Agency," Cambridge Books, Cambridge University Press, number 9780521785235, September.
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    Cited by:

    1. John Quiggin & Robert G. Chambers, 2006. "The state-contingent approach to production under uncertainty ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(2), pages 153-169, June.
    2. Walter Briec & Laurent Cavaignac, 2009. "An extension of the multi-output state-contingent production model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 39(1), pages 43-64, April.
    3. Robert G. Chambers & Tigran A. Melkonyan, 2010. "Regulatory Policy Design in an Uncertain World," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(6), pages 1081-1107, December.

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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