Moral hazard with bounded payments

Ian Jewitt, Ohad Kadan, Jeroen M. Swinkels*

*Corresponding author for this work

Research output: Contribution to journalArticle

48 Scopus citations

Abstract

We study the moral hazard problem with general upper and lower constraints M on compensation. We characterize the optimal contract and show existence and uniqueness. When minimizing costs for given effort, a principal harmed by M will pay according to M on some range of outcomes; when M reflects limited liability or a minimum wage, the contract is option-like. When the principal also chooses effort, a principal harmed by M might nonetheless never pay according to M. This cannot occur if the cost of inducing effort in the standard principal-agent problem is convex, for which we provide sufficient conditions related to the informativeness of outcome about effort.

Original languageEnglish (US)
Pages (from-to)59-82
Number of pages24
JournalJournal of Economic Theory
Volume143
Issue number1
DOIs
StatePublished - Nov 1 2008

Keywords

  • Compensation
  • Duality
  • Limited liability
  • Moral hazard
  • Options
  • Principal-agent models

ASJC Scopus subject areas

  • Economics and Econometrics

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