IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Flexible contracts

  • Piero Gottardi
  • Jean Marc Tallon
  • Paolo Ghirardato

This paper studies the costs and benefits of delegating decisions to superiorly informed agents 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 benefits, primarily the flexibility of the action choice. We first determine and characterize the properties of the optimal flexible 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 profitable a flexible contract relative to a rigid one. When the parties to not have sharp probability beliefs, the agent’s degree of imprecision aversion introduces another agency cost, which again reduces the relative profitability of flexible contracts.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://cadmus.eui.eu/bitstream/handle/1814/18096/ECO_2011_26.pdf?sequence=1
File Function: main text
Download Restriction: no

Paper provided by European University Institute in its series Economics Working Papers with number ECO2011/26.

as
in new window

Length:
Date of creation: 2011
Date of revision:
Handle: RePEc:eui:euiwps:eco2011/26
Contact details of provider: Postal:
Badia Fiesolana, Via dei Roccettini, 9, 50014 San Domenico di Fiesole (FI) Italy

Phone: +39-055-4685.982
Fax: +39-055-4685.902
Web page: http://www.eui.eu/ECO/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Ernst Fehr & Oliver D. Hart & Christian Zehnder, 2008. "Contracts as Reference Points - Experimental Evidence," NBER Working Papers 14501, National Bureau of Economic Research, Inc.
  2. 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).
  3. Aghion, Philippe & Tirole, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  5. Jean-Marc Tallon & Sujoy Mukerji, 2004. "Ambiguity aversion and the absence of wage indexation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00174562, HAL.
  6. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-87, May.
  7. Bruno Jullien & Bernard Salanié & François Salanié, 1999. "Should More Risk-Averse Agents Exert More Effort?," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 24(1), pages 19-28, June.
  8. Ernst Fehr & Oliver Hart & Christian Zehnder, 2008. "Contracts as reference points � experimental evidence," IEW - Working Papers 393, Institute for Empirical Research in Economics - University of Zurich.
  9. 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.
  10. Mark Armstrong & John Vickers, 2010. "A Model of Delegated Project Choice," Econometrica, Econometric Society, vol. 78(1), pages 213-244, 01.
  11. Strzalecki, Tomasz & Werner, Jan, 2011. "Efficient allocations under ambiguity," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1173-1194, May.
  12. Ricardo Alonso & Niko Matouschek, 2008. "Optimal Delegation," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 259-293.
  13. Eliaz, Kfir & Spiegler, Ran, 2005. "A Mechanism-Design Approach to Speculative Trade," CEPR Discussion Papers 5434, C.E.P.R. Discussion Papers.
  14. 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.
  15. Wouter Dessein, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 811-838.
  16. Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, vol. 88(5), pages 1207-31, December.
  17. Raith, Michael, 2004. "Specific Knowledge and Performance Measurement," CEPR Discussion Papers 4262, C.E.P.R. Discussion Papers.
  18. 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).
  19. 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.
  20. repec:hal:journl:halshs-00174553 is not listed on IDEAS
  21. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
  22. repec:hal:journl:halshs-00451982 is not listed on IDEAS
  23. 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.
  24. 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.
  25. Ricardo Alonso & Niko Matouschek, 2008. "Optimal delegation," LSE Research Online Documents on Economics 58665, London School of Economics and Political Science, LSE Library.
  26. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 1-48.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eui:euiwps:eco2011/26. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anne Banks)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.