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Flexible contracts

  • Piero Gottardi
  • Jean-Marc Tallon
  • Paolo Ghirardato

This paper studies the costs and bene?ts of delegating decisions to superiorly informed agents, that is of adopting ?exible contracts, relative to the use of rigid, non discretionary contracts. The main focus of the paper lies in the analysis of the costs of delegation, primarily agency costs, versus their bene?ts, primarily the ?exibility of the action choice in two di?erent environments, one with risk and one with ambiguity. We ?rst determine and characterize the properties of the optimal ?exible contract. We then show that the higher the agent’s degree of risk aversion, the higher is the agency costs of delegation and the less pro?table a ?exible contract relative to a rigid one. When the parties have imprecise probabilistic beliefs, the agent’s degree of imprecision aversion introduces another agency cost, which again reduces the relative pro?tability of ?exible contracts.

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File URL: http://www.carloalberto.org/assets/working-papers/no.128.pdf
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Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 128.

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Length: 50 pages
Date of creation: 2009
Date of revision: 2015
Handle: RePEc:cca:wpaper:128
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  1. Itzhak Gilboa & David Schmeidler, 1989. "Maxmin Expected Utility with Non-Unique Prior," Post-Print hal-00753237, HAL.
  2. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 1-48.
  3. Thibault Gajdos & Takashi Hayashi & Jean-Marc Tallon & Jean-Christophe Vergnaud, 2006. "Attitude toward imprecise information," Cahiers de la Maison des Sciences Economiques v06081, Université Panthéon-Sorbonne (Paris 1).
  4. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
  5. Itzhak Gilboa & Antoine Billot & Alain Chateauneuf & Jean-Marc Tallon, 2000. "Sharing Beliefs: between Agreeing and Disagreeing," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00753122, HAL.
  6. repec:ner:ucllon:http://discovery.ucl.ac.uk/17678/ is not listed on IDEAS
  7. Mukerji, S., 1997. "Ambiguity aversion and incompleteness of contractual form," Discussion Paper Series In Economics And Econometrics 9715, Economics Division, School of Social Sciences, University of Southampton.
  8. Mark Armstrong & John Vickers, 2010. "A Model of Delegated Project Choice," Econometrica, Econometric Society, vol. 78(1), pages 213-244, 01.
  9. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  10. David Ahn & Syngjoo Choi & Douglas Gale & Shachar Kariv, 2014. "Estimating ambiguity aversion in a portfolio choice experiment," Quantitative Economics, Econometric Society, vol. 5, pages 195-223, 07.
  11. Fehr, Ernst & Hart, Oliver & Zehnder, Christian, 2008. "Contracts as Reference Points: Experimental Evidence," IZA Discussion Papers 3889, Institute for the Study of Labor (IZA).
  12. Ian Jewitt, 1987. "Risk Aversion and the Choice Between Risky Prospects: The Preservation of Comparative Statics Results," Review of Economic Studies, Oxford University Press, vol. 54(1), pages 73-85.
  13. Alonso, Ricardo & Matouschek, Niko, 2005. "Optimal Delegation," CEPR Discussion Papers 5289, C.E.P.R. Discussion Papers.
  14. repec:hal:journl:halshs-00174553 is not listed on IDEAS
  15. Ricardo Alonso & Niko Matouschek, 2008. "Optimal delegation," LSE Research Online Documents on Economics 58665, London School of Economics and Political Science, LSE Library.
  16. Eliaz, Kfir & Spiegler, Ran, 2005. "A Mechanism-Design Approach to Speculative Trade," CEPR Discussion Papers 5434, C.E.P.R. Discussion Papers.
  17. Michael Raith, 2008. "Specific knowledge and performance measurement," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1059-1079.
  18. Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  19. Jullien, B. & Salanie, B. & Salanie, F., 1998. "Should More Risk-Averse Agents Exert More Effort?," Papers 98.489, Toulouse - GREMAQ.
  20. Strzalecki, Tomasz & Werner, Jan, 2011. "Efficient allocations under ambiguity," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1173-1194, May.
  21. Wouter Dessein, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 811-838.
  22. repec:hal:journl:halshs-00451982 is not listed on IDEAS
  23. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
  24. Rantakari Heikki V, 2008. "On the Role of Uncertainty in the Risk-Incentives Tradeoff," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 8(1), pages 1-25, April.
  25. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
  26. Wouter Dessein, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 811-838.
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