Incentive contracts with unobservable competence levels

Jerome Davis; Hans Keiding

doi:10.2174/1874919400801010047

Incentive contracts with unobservable competence levels

Jerome Davis, Hans Keiding

Økonomisk Institut

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Abstract

En kontrakt hvor en part betales efterfølgende afhængigt af tilfredsstillende resultat, kendt som en no-cure-no-pa kontrakt, kan opstå under forskellige vilkår. I dette papir modelleres kontraktvalget som en principal-agent kontrakt, hvor der foreligger skjult information såvel med hensyn til både agentens indsats og generelle kompetence. Agenten tilbyder principalen en kontrakt og signallerer dermed kompetence. Det vises, at i denne situation vil den optimale kontrakt have form som en no-cure-no-pay kontrakt.

Originalsprog	Engelsk
Tidsskrift	Open Economics Journal
Vol/bind	1
Sider (fra-til)	47-54
Antal sider	8
ISSN	1874-9194
DOI	https://doi.org/10.2174/1874919400801010047
Status	Udgivet - 2008

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10.2174/1874919400801010047

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abstract = "A contract where the agent is compensated ex post only upon satisfactory performance, often called a no-cureno- pay contract, can arise as under several circumstances. In this paper, we model the problem of contractual choice as a principal-agent contract which is modified due to hidden information about the competence of the agent to fulfill the obligations of the contract. The agent offers a choice of contracts to the principal, thereby signalling agent competence to the principal, and there is no alternative reputation mechanism to the contract for the principal's bargaining strategy. It turns out that in this situation, the optimal contract will have a form which may be recognized as a no-cure-no-pay contract.",

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AB - A contract where the agent is compensated ex post only upon satisfactory performance, often called a no-cureno- pay contract, can arise as under several circumstances. In this paper, we model the problem of contractual choice as a principal-agent contract which is modified due to hidden information about the competence of the agent to fulfill the obligations of the contract. The agent offers a choice of contracts to the principal, thereby signalling agent competence to the principal, and there is no alternative reputation mechanism to the contract for the principal's bargaining strategy. It turns out that in this situation, the optimal contract will have a form which may be recognized as a no-cure-no-pay contract.

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Incentive contracts with unobservable competence levels

Abstract

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