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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. Jullien, B. & Salanie, B. & Salanie, F., 1998. "Should More Risk-Averse Agents Exert More Effort?," Papers 98.489, Toulouse - GREMAQ.
  2. Sujoy Mukerji & Peter Klibanoff, 2002. "A Smooth Model of Decision,Making Under Ambiguity," Economics Series Working Papers 113, University of Oxford, Department of Economics.
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  7. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  8. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
  9. 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.
  10. Sujoy Mukerji & Jean-Marc Tallon, 2002. "Ambiguity Aversion and the Absence of Wage Indexation," Economics Series Working Papers 111, University of Oxford, Department of Economics.
  11. Tomasz Strzalecki & Jan Werner, . "Efficient Allocations under Ambiguity," Working Paper 8325, Harvard University OpenScholar.
  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. Wouter Dessein, 2000. "Authority and Communication in Organizations," Econometric Society World Congress 2000 Contributed Papers 1747, Econometric Society.
  14. Billot, A. & Chateauneuf, A. & Gilboa, I. & Tallon, J.-M., 1998. "Sharing Beliefs: Between Agreeing and Disagreeing," Papiers d'Economie Mathématique et Applications 98.30, Université Panthéon-Sorbonne (Paris 1).
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  21. 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.
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  26. Raith, Michael, 2004. "Specific Knowledge and Performance Measurement," CEPR Discussion Papers 4262, C.E.P.R. Discussion Papers.
  27. 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.
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