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Multi-period Contract Problems with Verifiable and Unverifiable Outputs

Author

Listed:
  • Kazuya Kamiya

    (Faculty of Economics, University of Tokyo)

  • Meg Sato

    (Crawford School of Economics & Government, The Australian National University)

Abstract

Labour contracts tend to be more complicated than one simple short or long-term contract which is the basis of previous studies. Combinations of different length contracts become essential when principals expect to maximize not only verifiable outputs but also observable but unverifiable outputs, e.g., leadership. This paper is the first to develop a theoretical model of multi-period contracts that combine short-, mid-, and long-term contracts. We show that combinations of different length contracts vary by the relative importance of verifiable and unverifiable outputs and relative efficiency of investments in human capital made for each output. We also determine thresholds where the principal switches from offering one type of contract to the other.

Suggested Citation

  • Kazuya Kamiya & Meg Sato, 2011. "Multi-period Contract Problems with Verifiable and Unverifiable Outputs," CIRJE F-Series CIRJE-F-800, CIRJE, Faculty of Economics, University of Tokyo.
  • Handle: RePEc:tky:fseres:2011cf800
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2011/2011cf800.pdf
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    References listed on IDEAS

    as
    1. Sunil Dutta & Stefan Reichelstein, 2003. "Leading Indicator Variables, Performance Measurement, and Long-Term Versus Short-Term Contracts," Journal of Accounting Research, Wiley Blackwell, vol. 41(5), pages 837-866, December.
    2. James A. Mirrlees, 1976. "The Optimal Structure of Incentives and Authority Within an Organization," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 105-131, Spring.
    3. Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 169-182.
    4. Eric Maskin & Jean Tirole, 1999. "Two Remarks on the Property-Rights Literature," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 139-149.
    5. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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