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Optimality of linearity with collusion and renegotiation

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  • Barlo, Mehmet
  • Özdog˜an, Ayça

Abstract

This study analyzes a continuous-time N-agent Brownian moral hazard model with constant absolute risk aversion (CARA) utilities, in which agents’ actions jointly determine the mean and variance of the outcome process. In order to give a theoretical justification for the use of linear contracts, as in Holmstrom and Milgrom (1987), we consider a variant of its generalization given by Sung (1995), into which collusion and renegotiation possibilities among agents are incorporated. In this model, we prove that there exists a linear and stationary optimal compensation scheme which is also immune to collusion and renegotiation.

Suggested Citation

  • Barlo, Mehmet & Özdog˜an, Ayça, 2014. "Optimality of linearity with collusion and renegotiation," Mathematical Social Sciences, Elsevier, vol. 71(C), pages 46-52.
    • Handle: RePEc:eee:matsoc:v:71:y:2014:i:c:p:46-52
    DOI: 10.1016/j.mathsocsci.2014.04.004
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    References listed on IDEAS

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    Cited by:

    1. Barlo, Mehmet & Ayca, Ozdogan, 2012. "Team beats collusion," MPRA Paper 37449, University Library of Munich, Germany.
    2. Mehmet Barlo & Ayça Özdoğan, 2013. "The Optimality of Team Contracts," Games, MDPI, vol. 4(4), pages 1-20, November.

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    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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