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Flexible contracts

Author

Listed:
  • Piero Gottardi

    (EUI - European University Institute)

  • Jean-Marc Tallon

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Paolo Ghirardato

    (Collegio Carlo Alberto - Via Real Collegio 30)

Abstract

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 agents'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.

Suggested Citation

  • Piero Gottardi & Jean-Marc Tallon & Paolo Ghirardato, 2011. "Flexible contracts," Post-Print halshs-00429784, HAL.
    • Handle: RePEc:hal:journl:halshs-00429784
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00429784v2
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    imprecision aversion; multiple priors; flexibility; agency costs; Délégation; flexibilité; coût d'agence; croyances multiples; aversion pour l'imprécision;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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