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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 c...

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Publication status:
Published
Peer review status:
Not peer reviewed
Version:
Author's Original

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Publisher copy:
10.1016/j.jet.2007.12.004

Authors


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Institution:
University of Oxford
Ohad Kadan More by this author
Jeroen M Swinkels More by this author
Publisher:
Elsevier Publisher's website
Journal:
Journal of Economic Theory Journal website
Volume:
143
Issue:
1
Publication date:
2008
DOI:
URN:
uuid:78364c1b-7232-4016-bf94-6a8e1e9ba929
Local pid:
oai:economics.ouls.ox.ac.uk:14235
Language:
English

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