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Bayesian Analysis of Linear Contracts

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  • Tal Alon
  • Paul Dutting
  • Yingkai Li
  • Inbal Talgam-Cohen

Abstract

We provide a justification for the prevalence of linear (commission-based) contracts in practice under the Bayesian framework. We consider a hidden-action principal-agent model, in which actions require different amounts of effort, and the agent's cost per-unit-of-effort is private. We show that linear contracts are near-optimal whenever there is sufficient uncertainty in the principal-agent setting.

Suggested Citation

  • Tal Alon & Paul Dutting & Yingkai Li & Inbal Talgam-Cohen, 2022. "Bayesian Analysis of Linear Contracts," Papers 2211.06850, arXiv.org, revised Jul 2023.
    • Handle: RePEc:arx:papers:2211.06850
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    References listed on IDEAS

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    1. Vu, Anh Ngoc, 2023. "Demand reduction campaigns for the illegal wildlife trade in authoritarian Vietnam: Ungrounded environmentalism," World Development, Elsevier, vol. 164(C).

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