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Motivating versus Funding

Author

Listed:
  • Nicolas Querou
  • Antoine Soubeyran
  • Raphael Soubeyran

Abstract

We consider a moral hazard problem where the agent's effort induces monetary costs.In such a problem, limits on the agent's resource restrict his capability to exert effort (i.e., constrain his set of possible actions). We show that the optimal contract is, in some cases, a sharing contract and that the principal provides the agent with an up-front financial transfer. Moreover, whereas incentives and transfer to the agent are substitutes in the case where the agent has suficient wealth, they are complements when the agent's wealth is limited. It is also shown that, if the agent can consume some of his wealth at the outset of the contractual arrangement, he gets all the surplus of the relationship. We discuss the implications of our findings in a variety of settings, including venture capital, franchising, payments for environmental services and a current debate on wealth and cognitive functions.

Suggested Citation

  • Nicolas Querou & Antoine Soubeyran & Raphael Soubeyran, 2015. "Motivating versus Funding," Working Papers 15-11, LAMETA, Universtiy of Montpellier, revised Oct 2015.
  • Handle: RePEc:lam:wpaper:15-11
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    File URL: http://www.lameta.univ-montp1.fr/Documents/DR2015-11.pdf
    File Function: Revised version, october 2016
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    References listed on IDEAS

    as
    1. Muñoz-Piña, Carlos & Guevara, Alejandro & Torres, Juan Manuel & Braña, Josefina, 2008. "Paying for the hydrological services of Mexico's forests: Analysis, negotiations and results," Ecological Economics, Elsevier, vol. 65(4), pages 725-736, May.
    2. Eswaran, Mukesh & Kotwal, Ashok, 1985. "A Theory of Contractual Structure in Agriculture," American Economic Review, American Economic Association, vol. 75(3), pages 352-367, June.
    3. Burkett, Justin, 2015. "Endogenous budget constraints in auctions," Journal of Economic Theory, Elsevier, vol. 158(PA), pages 1-20.
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    Cited by:

    1. Inés Macho-Stadler & David Pérez-Castrillo, 2018. "Moral hazard: Base models and two extensions," Chapters,in: Handbook of Game Theory and Industrial Organization, Volume I, chapter 16, pages 453-485 Edward Elgar Publishing.
    2. Meunier Guy & Ponssard Jean-Pierre, 2017. "Financing innovative green projects with asymmetric information and costly public funds," Working Papers 2017-55, Center for Research in Economics and Statistics.

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