A Theory of Threshold Contracts
We consider an in nitely repeated reappointment game in a principal- agent relationship. Typical examples are voter-politician or government- public servant relationships. The agent chooses costly effort and enjoys being in office until he is deselected. The principal observes a noisy signal of the agent's effort and decides whether to reappoint the agent or not. We analyse the stationary Markovian equilibria of this game and examine the consequences of threshold contracts, which forbid reappointment if the principal's utility is too low. We identify the circumstances under which such threshold contracts are welfare-improving or beneficial for the principal.
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- Gersbach, Hans, 2008.
CEPR Discussion Papers
6763, C.E.P.R. Discussion Papers.
- Patrick Bolton & Mathias Dewatripont, 2005.
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262025760, June.
- Hans Gersbach & Verena Liessem, 2008.
"Reelection threshold contracts in politics,"
Social Choice and Welfare,
Springer, vol. 31(2), pages 233-255, August.
- John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, vol. 50(1), pages 5-25, January.
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