Journal article
Moral hazard with bounded payments
- 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.
- Publication status:
- Published
- Peer review status:
- Not peer reviewed
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- Files:
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(Preview, Author's original, pdf, 519.7KB, Terms of use)
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- Publisher copy:
- 10.1016/j.jet.2007.12.004
Authors
- Publisher:
- Elsevier
- Journal:
- Journal of Economic Theory More from this journal
- Volume:
- 143
- Issue:
- 1
- Pages:
- 59 - 82
- Publication date:
- 2008-01-01
- DOI:
- ISSN:
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0022-0531
- Language:
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English
- UUID:
-
uuid:78364c1b-7232-4016-bf94-6a8e1e9ba929
- Local pid:
-
oai:economics.ouls.ox.ac.uk:14235
- Deposit date:
-
2011-08-16
Terms of use
- Copyright holder:
- Elsevier Inc
- Copyright date:
- 2008
- Notes:
- The version of this article in ORA is by Ohad Kadan and Jeroen M. Swinkels. Copyright 2008 Elsevier Inc. All rights reserved. NOTICE: this is the author's version of a work that was accepted for publication in Journal of Economic Theory. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Economic Theory, 143, 1, (November 2008) DOI#10.1016/j.jet.2007.12.004
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