Multi-Period Contract Problems with Verifiable and Unverifiable Outputs
Labour contracts tend to be more complicated than one simple short or long-term contract which is the basis of previous studies. Combinations of different length contracts become essential when principals expect to maximize not only verifiable outputs but also observable but unverifiable outputs, e.g., leadership. This paper is the first to develop a theoretical model of multi-period contracts that combine short-, mid-, and long-term contracts. We show that combinations of different length contracts vary by the relative importance of verifiable and unverifiable outputs and relative efficiency of investments in human capital made for each output. We also determine thresholds where the principal switches from offering one type of contract to the other.
|Date of creation:||Apr 2011|
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- Bengt Holmstrom, 1997.
"Moral Hazard and Observability,"
Levine's Working Paper Archive
1205, David K. Levine.
- James A. Mirrlees, 1976. "The Optimal Structure of Incentives and Authority Within an Organization," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 105-131, Spring.
- Eric Maskin & Jean Tirole, 1999. "Two Remarks on the Property-Rights Literature," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 139-149.
- Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 169-182.
- Sunil Dutta & Stefan Reichelstein, 2003. "Leading Indicator Variables, Performance Measurement, and Long-Term Versus Short-Term Contracts," Journal of Accounting Research, Wiley Blackwell, vol. 41(5), pages 837-866, December.
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