Optimal Partnership Contracts: Foundation and Duality
We use the duality in linear programming to solve the problem of optimal contracts with moral hazards. We show the importance of allowing the partners to throw away outputs under some contingencies. A two-step procedure is used to find the optimal contracts. The first step minimizes the loss from undistributed outputs, and in the second step, a second best solution is found. A characterization of the optimal contracts in 2-by-2-by-2 partnership games is o?ered. Such contracts implement an optimal strategy profile which either has no incentive cost to implement or is near a pure strategy profile.
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