Sharp and Diffuse Incentives in Contracting
This paper investigates the optimality of sharp incentives in contracts where output prices are set at the time of contracting but are random in nature. It shows that when prices are specified with error, schemes involving sharp incentives might result in substantial deviations from first-best output levels. The randomness of prices creates arbitrage opportunities that are exploited by agents producing phenomena such as "cost-shifting". Both linear and piece-wise linear contracts are shown to be subject to the possibility of arbitrage. The paper then demonstrates that incentive schemes that are arbitrage-proof exhibit "diffuse" incentives.
|Date of creation:||2007|
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References listed on IDEAS
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- Pascal Courty & Gerald Marschke, 2004.
"An Empirical Investigation of Gaming Responses to Explicit Performance Incentives,"
Journal of Labor Economics,
University of Chicago Press, vol. 22(1), pages 23-56, January.
- Courty, Pascal & Marschke, Gerald, 2002. "An Empirical Investigation of Gaming Responses to Explicit Performance Incentives," CEPR Discussion Papers 3164, C.E.P.R. Discussion Papers.
- Gerald Marschke & Pascal Courty, 2002. "An Empirical Investigation of Gaming Responses to Explicit Performance Incentives," Discussion Papers 02-06, University at Albany, SUNY, Department of Economics.
- Elizabeth Webster & Glenys Harding, 2001. "Outsourcing Public Employment Services: The Australian Experience," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 34(2), pages 231-242.
- Elizabeth Webster & Glenys Harding, 2000. "Outsourcing Public Employment Services: The Australian Experience," Melbourne Institute Working Paper Series wp2000n04, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
- Chambers,Robert G. & Quiggin,John, 2000. "Uncertainty, Production, Choice, and Agency," Cambridge Books, Cambridge University Press, number 9780521622448, August.
- Chambers,Robert G. & Quiggin,John, 2000. "Uncertainty, Production, Choice, and Agency," Cambridge Books, Cambridge University Press, number 9780521785235, August.
- J. A. Mirrlees, 1999. "The Theory of Moral Hazard and Unobservable Behaviour: Part I," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 3-21.
- Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
- Simon Burgess & Marisa Ratto, 2003. "The Role of Incentives in the Public Sector: Issues and Evidence," The Centre for Market and Public Organisation 03/071, Department of Economics, University of Bristol, UK. Full references (including those not matched with items on IDEAS)
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