Comparative statics of the optimal dynamic incentive contract

Jean Jacques Laffont*, Jean Tirole

*Corresponding author for this work

Research output: Contribution to journalArticle

51 Scopus citations

Abstract

Each period a firm must carry out an indivisible project, the cost of which depends on the firm's constant efficiency and its (variable) level of 'effort'. Only the cost is observed by the regulator who has to choose the incentive scheme. The optimal dynamic mechanism is derived under possible commitment of the regulator over time. Then, under non-commitment, it is shown that there are four types of continuation equilibria. Also the profile of effort levels is compared to the commitment case. Finally, some numerical comparative statics is performed and it is shown that all types of equilibria can be optimal.

Original languageEnglish (US)
Pages (from-to)901-926
Number of pages26
JournalEuropean Economic Review
Volume31
Issue number4
DOIs
StatePublished - Jun 1987

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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