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Implementing high-powered contracts to motivate intertemporal effort supply


  • Leon Yang Chu
  • David E.M. Sappington


We characterize the optimal contract between a principal and a risk-neutral, wealth-constrained agent when an adverse selection problem follows a moral hazard problem. The optimal contract in this setting often is more steeply sloped for the largest output levels than is the optimal contract in either the standard moral hazard setting or the standard adverse selection setting. The large incremental rewards for exceptional performance motivate the agent to deliver substantial effort both before and after he acquires privileged information about the production environment. Copyright (c) 2009, RAND.

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  • Leon Yang Chu & David E.M. Sappington, 2009. "Implementing high-powered contracts to motivate intertemporal effort supply," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 296-316.
  • Handle: RePEc:bla:randje:v:40:y:2009:i:2:p:296-316

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    References listed on IDEAS

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    1. Chandrashekeran, Sangeetha & Zuckerman, Julia & Deason, Jeff, 2015. "Raising the stakes for energy efficiency: A qualitative case study of California's risk/reward incentive mechanism," Utilities Policy, Elsevier, vol. 36(C), pages 79-90.
    2. Heiko Karle & Christian Staat, 2013. "Signaling Quality with Initially Reduced Royalty Rates," Working Papers ECARES ECARES 2013-44, ULB -- Universite Libre de Bruxelles.
    3. Sumitro Banerjee & Alex P. Thevaranjan, 2013. "How to deal with unprofitable customers? A salesforce compensation perspective," ESMT Research Working Papers ESMT-13-05, ESMT European School of Management and Technology.
    4. Melo, Pedro Lucas de Resende & Borini, Felipe Mendes & Oliveira Junior, Moacir de Miranda & Parente, Ronaldo Couto, 2015. "Internacionalização das redes de franquias brasileiras: um estudo comparativo," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 55(3), May.
    5. Yan Dong & Kefeng Xu & Yi Xu & Xiang Wan, 2016. "Quality Management in Multi-Level Supply Chains with Outsourced Manufacturing," Production and Operations Management, Production and Operations Management Society, vol. 25(2), pages 290-305, February.
    6. Kräkel, Matthias & Müller, Daniel, 2013. "Bad Mergers Revisited: An Incentive Perspective," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79914, Verein für Socialpolitik / German Economic Association.

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