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Optimal stationary contract with two-sided imperfect enforcement and persistent adverse selection

Author

Listed:
  • David Martimort

    (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 nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique)

  • Aggey Semenov

    (University of Ottawa [Ottawa])

  • Lars Stole

    (Booth School of Business [Chicago] - University of Chicago)

Abstract

We consider an infinitely-repeated principal–agent relationship run with stationary contracts. The agent has private information on his persistent cost parameter and, under limited enforcement, both parties can breach the contract. The optimal stationary contract with limited enforcement is made of two distinct pieces. For the most efficient types of the agent, the contract entails bunching with a fixed payment and a fixed output. For less efficient types, the contract exhibits downward output distortions below the Baron–Myerson level that would have been achieved had enforcement been costless.

Suggested Citation

  • David Martimort & Aggey Semenov & Lars Stole, 2017. "Optimal stationary contract with two-sided imperfect enforcement and persistent adverse selection," Post-Print halshs-01630253, HAL.
    • Handle: RePEc:hal:journl:halshs-01630253
    DOI: 10.1016/j.econlet.2017.07.007
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    Cited by:

    1. Shiv Dixit, 2023. "Contract Enforcement and Preventive Healthcare: Theory and Evidence," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 1048-1094, December.

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    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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