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on Contract Theory and Applications |
| By: | Th\'eo Durandard; Udayan Vaidya; Boli Xu |
| Abstract: | A principal contracts with an agent who can sequentially search over projects to generate a prize. The principal knows only one of the agent's available projects and evaluates a contract by its worst-case performance. We characterize the set of robustly optimal contracts, all of which involve a minimum debt level, i.e., the agent only receives payment if the prize exceeds a certain threshold. This debt requirement is essential to prevent the agent from terminating the search too early. Our characterization encompasses several commonly observed contract formats, including pure debt, debt-plus-equity, and tranches. We also study situations where each of these contracts emerges as the unique prediction. In contrast to much of the existing robust contracting literature, linear contracts are strictly sub-optimal because they dampen the agent's search incentive. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.17948 |
| By: | Dominique Demougin; Benjamin Bental |
| Abstract: | In this study, we examine two adjudication methods designed to resolve disputes between principals and agents concerning bonus payments in relationships characterized by moral hazard and where the parties have been forced to use soft, imprecise, and subjective information to align incentives. The first method is a procedural approach where the court applies preponderance-of-the-evidence to determine whether the agent acted in accordance with the contract. In the second method, the court adopts a substantive approach, treating the original contract as incomplete, thus rendering a decision based on what it believes the parties would have agreed upon had they been able to complete the contract ahead of time. From an efficiency standpoint, we find that neither method consistently outperforms the other, although the procedural approach becomes more advantageous as the effort to be implemented becomes sufficiently large. |
| Keywords: | moral hazard, incentive contracting. |
| JEL: | D82 D86 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11861 |
| By: | Beomjun Kim |
| Abstract: | This paper considers the optimal management structure about hiring a manager and providing the manager with a separate salary and bonus using a relational contract among an owner, a manager, and workers, assuming that the manager can observe individual worker performances while the owner can observe only overall team performance. I derive optimal contracts for the two cases in which the manage's salary and bonus are integrated into total team bonus or provided separately. I compare situations of having the manager distribute bonuses based on individual worker performance to the situation of equal bonus distribution based on overall team performance without a manager. Only a contract with a manager who receives a separate bonus is feasible for low discount factor. Making the manager to distribute the salary and bonus including himself is best with intermediate discount factor. Providing an equal bonus without a manager is optimal with high discount factor. |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.21264 |
| By: | Arve, Malin (Dept. of Business and Management Science, Norwegian School of Economics); Dyskeland, Ole Kristian (Dept. of Business and Management Science, Norwegian School of Economics); Foros, Øystein (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | We analyze competition between two digital platforms selling subscriptions for unlimited access to their content catalogs (e.g., streaming and TV broadcasting platforms). A content provider offers additional content to the platforms. The content provider chooses between offering a revenue sharing contract and a per-consumer wholesale pricing contract towards the platforms, thereby endogenously determining whether its content will be distributed non-exclusively (on both platforms) or exclusively (on one platform). Our model yields clear predictions: In markets with low initial exclusivity, the content provider and both platforms prefer per-consumer wholesale pricing to endogenously promote non-exclusive distribution. Platforms set subscription prices that lead to full consumer singlehoming. Conversely, in markets with high initial exclusivity, all market players prefer a revenue-sharing contract that induces exclusive distribution, with platforms setting prices that encourage some consumers to multihome. |
| Keywords: | Multihoming; incremental pricing; content provision |
| JEL: | L13 L14 L82 |
| Date: | 2025–05–13 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nhhfms:2025_017 |