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on Contract Theory and Applications |
| By: | Pau Milán; Nicolás Oviedo Dávila |
| Abstract: | Risk-averse workers in a team exert effort to produce joint output. Workers’ incentives are connected via chains of productivity spillovers, represented by a network of peer-effects. We study the problem of a principal offering wage contracts that simultaneously incentivize and insure agents. We solve for the optimal linear contract for any network and show that optimal incentives are loaded more heavily on workers that are more central in a specific way. We conveniently link firm profits to network structure via the networks spectral properties. When firms can’t personalize contracts, better connected workers ex- tract rents. In this case, a group composition result follows: large within-group differences in centrality can decrease firm’s profits. Finally, we find that modular production has important implications for how peer structures distribute incentives. |
| Keywords: | moral hazard, Networks, Incentives, Organizations, contracts |
| JEL: | D11 D52 D53 G52 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1439&r=cta |
| By: | Daniel Krähmer; Roland Strausz |
| Abstract: | We study unidirectional incentive compatibility which incentivizes an agent to report truthfully when she can misrepresent private information in one direction only. In the canonical setting with continuous, one-dimensional private information, and quasi-linear utility, unidirectional incentive compatibility imposes no restrictions on the allocation rule and holds if and only if the change of the agent’s information rent function respects a lower bound that is based on the allocation rule’s monotone envelope. In monopolistic screening models with strong interdependent values or with countervailing incentives, optimal contracts differ from optimal bidirectionally incentive compatible contracts, possibly displaying non-monotone allocations. |
| Keywords: | Screening, Verifiability, Implementability, Optimal Contracting |
| JEL: | D82 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_524&r=cta |
| By: | Daniel Krähmer; Roland Strausz |
| Abstract: | We consider a dynamic screening model, where the agent may go bankrupt due to, for example, cash constraints. We model bankruptcy as a verifiable event that occurs whenever the agent makes a per period loss. This leads to less stringent truth-telling constraints than those considered in the existing literature. We show that, for serially independent types, the weaker constraints do not affect optimal contracting, however. Moreover, we develop a novel method to study private values settings with continuous types and show that a regularity condition that has analogues in the literature on multi-dimensional screening ensures that the optimal contract is deterministic. |
| Keywords: | Dynamic Screening, Bankruptcy, Verifiability, Mean Preserving Spread |
| JEL: | D82 H57 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_525&r=cta |
| By: | Georgiadis, George; Ravid, Doron; Szentes, Balázs |
| Abstract: | This paper considers a moral hazard problem where the agent can choose any output distribution with a support in a given compact set. The agent's effort-cost is smooth and increasing in first-order stochastic dominance. To analyze this model, we develop a generalized notion of the first-order approach applicable to optimization problems over measures. We demonstrate each output distribution can be implemented and identify those contracts that implement that distribution. These contracts are characterized by a simple first-order condition for each output that equates the agent's marginal cost of changing the implemented distribution around that output with its marginal benefit. Furthermore, the agent's wage is shown to be increasing in output. Finally, we consider the problem of a profit-maximizing principal and provide a first-order characterization of principal-optimal distributions. |
| Keywords: | principle-agent; moral hazard; contract theory |
| JEL: | J1 |
| Date: | 2024–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:122548&r=cta |
| By: | Daniel Krähmer |
| Abstract: | The paper studies the canonical hold-up problem with one-sided investment by the buyer and full ex post bargaining power by the seller. The buyer can covertly choose any distribution of valuations at a cost and privately observes her valuation. The main result shows that in contrast to the well-understood case with linear costs, if investment costs are strictly convex in the buyer’s valuation distribution, the buyer’s equilibrium utility is strictly positive and to- tal welfare is strictly higher than in the benchmark when valuations are public information, thus alleviating the hold-up problem. In fact, when costs are mean-based or display decreas- ing risk, the hold-up problem may disappear completely. Moreover, the buyer’s equilibrium utility and total welfare might be non-monotone in costs. The paper utilizes an equilibrium characterization in terms of the Gateaux derivative of the cost function. |
| Keywords: | Information Design, Hold-Up Problem, Unobservable Information |
| JEL: | C61 D42 D82 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_523&r=cta |