nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2017‒09‒03
six papers chosen by
Guillem Roig
University of Melbourne

  1. Simple Contracts under Observable and Hidden Actions By Bo Chen; Yu Chen; David Rietzke
  2. Optimal Contracts with Reflection By Yuzhe Zhang; Borys Grochulski
  3. Common agency dilemma with information asymmetry in continuous time By Thibaut Mastrolia; Zhenjie Ren
  4. Moral Hazard: Experimental Evidence from Tenancy Contracts By Burchardi, Konrad B.; Gulesci, Selim; Lerva, Benedetta; Sulaiman, Munshi
  5. Profitable and desirable corporate environmentalism in a delegation contract under incentive subsidy on abatement technologies By Lee, Sang-Ho; Park, Chul-Hi
  6. Fixed-term contracts – a turnoff for R&D employees By Aaro Hazak

  1. By: Bo Chen (Southern Methodist University, USA); Yu Chen (University of Graz, Austria); David Rietzke (Lancaster University, UK)
    Abstract: We consider a general framework for multitask moral hazard problems with observable and hidden actions. Ideally, the principal in our framework can design optimal contracts that depend on both observable (and verifiable) actions and realized outcomes. Given a mild assumption on the existence of a punishment scheme, we identify a general equivalence result, dubbed the "forcing principle", which states that every optimal contract in our framework is strategically equivalent to a simple forcing contract that is essentially outcome-contingent. The forcing contract only specifies an outcome-contingent reward scheme and an action profile, and the agent receives the outcome-contingent reward only if he follows the recommended observable actions (and is otherwise punished severely). The forcing principle has useful implications: It confers analytic advantage for the existence and computation of optimal contracts in our setting. It also highlights the importance of the existence of the punishment scheme in characterizing first-best benchmarks in moral hazard problems, which is typically ignored in the literature.
    Keywords: First-best Benchmark; Forcing Contract; Forcing Principle; Moral Hazard; Multitask; Observable Actions
    JEL: C61 C62 D82 D86
    Date: 2017–08
  2. By: Yuzhe Zhang (Texas A&M University); Borys Grochulski (Federal Reserve Bank of Richmond)
    Abstract: In this paper, we show that whenever the agent's outside option is nonzero, the optimal contract in the continuous-time principal-agent model of Sannikov (2008) is reflective at the lower bound. This means the agent is never terminated or retired after poor performance. Instead, the agent is asked to suspend effort temporarily, as in Zhu (2013), which brings the agent's continuation value up. The agent is then asked to resume effort, and the contract continues. We show that a nonzero agent's outside option arises endogenously if the agent is allowed to quit and find a new rm. In addition, we find new dynamics of the reflection at the lower bound. In the baseline model, the reflection is slow, as in Zhu (2013), i.e., effort is suspended often. However, if the agent's disutility from the first unit of effort is zero, which is a standard Inada condition, or if his utility of consumption is unbounded below, the reflection becomes fast, i.e., effort is suspended seldom.
    Date: 2017
  3. By: Thibaut Mastrolia (CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique - Polytechnique - X - CNRS - Centre National de la Recherche Scientifique); Zhenjie Ren (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS - Centre National de la Recherche Scientifique - Université Paris-Dauphine)
    Abstract: In this paper, we consider a problem of contract theory in which several Principals hire a common Agent and we study the model in the continuous time setting. We show that optimal contracts should satisfy some equilibrium conditions and we reduce the optimisation problem of the Principals to a system of coupled Hamilton-Jacobi-Bellman (HJB) equations. Further, in a more specific linear-quadratic model where two interacting Principals hire one common Agent, we are able to calculate the optimal effort by the Agent for both Principals. In this continuous time model, we extend the result of Bernheim and Whinston (1986) in which the authors compare the optimal effort of the Agent in a non-cooperative Principals model and that in the aggregate model, and give the condition under which these two optimisations coincide.
    Keywords: Moral hazard models,common agency,system of HJB equations,BSDEs
    Date: 2017–06–07
  4. By: Burchardi, Konrad B.; Gulesci, Selim; Lerva, Benedetta; Sulaiman, Munshi
    Abstract: We report results from a field experiment designed to estimate the effects of tenancy contracts on agricultural input choices, risk-taking, and output. The experiment induced variation in the terms of sharecropping contracts: some tenants paid 50% of output in compensation for land usage; others paid 25%; again others paid 50% of output and received cash, either fixed or stochastic. We find that tenants with higher output share utilized more inputs, cultivated riskier crops, and generated 60% more output relative to control. Cash transfers did not effect farm output. We interpret the increase in output as the incentive effect of sharecropping.
    Keywords: Agricultural Productivity; Contracts; Incentive Effects; Sharecropping
    JEL: C93 D22 O13
    Date: 2017–08
  5. By: Lee, Sang-Ho; Park, Chul-Hi
    Abstract: This study investigates corporate environmentalism in a managerial delegation contract and shows that a well-designed subsidy scheme can enhance business profitability and thus, an environmental policy could lead to both social and private benefits. This analysis allows us to better understand the Porter’s concept of environmental policy and firm’s profitability.
    Keywords: corporate environmentalism; environmental corporate social responsibility; managerial delegation contract; incentive subsidy scheme; Porter’s hypothesis
    JEL: L13 L21 M14
    Date: 2017–09–01
  6. By: Aaro Hazak
    Abstract: Fixed-term employment contracts are very common in the current project-based era. Our research group has been seeking to find out how fixed versus permanent contracts link to how Estonian R&D employee perceive their wellbeing, tiredness and sleepiness. We found that the happiness of those working with fixed-term contracts is significantly lower – both in terms of current happiness and potential happiness looking forward. Moreover, employees with fixed-term contracts appeared to be considerably more tired and experience greater levels of daytime sleepiness. We did not find, however, any significant differences in the perceived work results of R&D employees with fixed-term contracts compared to those with permanent contracts. Employers as well as R&D governance bodies should keep in mind the adverse effects that fixed-term contracts may have on individual wellbeing.
    Date: 2017–08–31

This nep-cta issue is ©2017 by Guillem Roig. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.