[go: up one dir, main page]

IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpga/0511007.html
   My bibliography  Save this paper

Contracting with Repeated Moral Hazard and Private Evaluations

Author

Listed:
  • William Fuchs

    (University of Chicago)

Abstract
A repeated moral hazard setting in which the Principal privately observes the Agent's output is studied. It is shown that there is no loss from restricting the analysis to contracts in which the Agent is supposed to exert effort every period, receives a constant efficiency wage and no feedback until he is fired. The optimal contract for a finite horizon is characterized, and shown to require burning of resources. These are only burnt after the worst possible realization sequence and the amount is independent of both the length of the horizon and the discount factor (δ). For the infinite horizon case a family of fixed interval review contracts is characterized and shown to achieve first best as δ → 1. The optimal contract when δ

Suggested Citation

  • William Fuchs, 2005. "Contracting with Repeated Moral Hazard and Private Evaluations," Game Theory and Information 0511007, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpga:0511007
    Note: Type of Document - pdf; pages: 40
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/game/papers/0511/0511007.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    2. Fehr, Ernst & Falk, Armin, 2002. "Psychological foundations of incentives," European Economic Review, Elsevier, vol. 46(4-5), pages 687-724, May.
    3. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
    4. Bhaskar, V. & van Damme, Eric, 2002. "Moral Hazard and Private Monitoring," Journal of Economic Theory, Elsevier, vol. 102(1), pages 16-39, January.
    5. Martin Brown & Armin Falk & Ernst Fehr, "undated". "Contractual Incompleteness and the Nature of Market Interactions," IEW - Working Papers 038, Institute for Empirical Research in Economics - University of Zurich.
    6. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    7. Charles Kahn & Dilip Mookherjee, 1988. "A Competitive Efficiency Wage Model with Keynesian Features," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(4), pages 609-645.
    8. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, vol. 93(1), pages 216-240, March.
    9. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    10. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    11. Abreu, Dilip & Milgrom, Paul & Pearce, David, 1991. "Information and Timing in Repeated Partnerships," Econometrica, Econometric Society, vol. 59(6), pages 1713-1733, November.
    12. Rosen, Sherwin, 1986. "Prizes and Incentives in Elimination Tournaments," American Economic Review, American Economic Association, vol. 76(4), pages 701-715, September.
    13. Compte, Olivier, 2002. "On Sustaining Cooperation without Public Observations," Journal of Economic Theory, Elsevier, vol. 102(1), pages 106-150, January.
    14. Jonathan Levin, 2002. "Multilateral Contracting and the Employment Relationship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(3), pages 1075-1103.
    15. George Baker & Robert Gibbons & Kevin J. Murphy, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1125-1156.
    16. Aoyagi, Masaki, 2002. "Collusion in Dynamic Bertrand Oligopoly with Correlated Private Signals and Communication," Journal of Economic Theory, Elsevier, vol. 102(1), pages 229-248, January.
    17. Massimiliano Amarante, 2003. "Recursive structure and equilibria in games with private monitoring," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 22(2), pages 353-374, September.
    18. Yeon-Koo Che & Seung-Weon Yoo, 2001. "Optimal Incentives for Teams," American Economic Review, American Economic Association, vol. 91(3), pages 525-541, June.
    19. repec:eme:rlepps:v:18:y:1999:i:1999:p:177-242 is not listed on IDEAS
    20. Malcomson, James M., 1999. "Individual employment contracts," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 35, pages 2291-2372 Elsevier.
    21. Kandori, Michihiro, 2002. "Introduction to Repeated Games with Private Monitoring," Journal of Economic Theory, Elsevier, vol. 102(1), pages 1-15, January.
    22. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
    23. Radner, Roy, 1985. "Repeated Principal-Agent Games with Discounting," Econometrica, Econometric Society, vol. 53(5), pages 1173-1198, September.
    24. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 39-84.
    25. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-480, March.
    26. Olivier Compte, 1998. "Communication in Repeated Games with Imperfect Private Monitoring," Econometrica, Econometric Society, vol. 66(3), pages 597-626, May.
    27. Pearce, David G. & Stacchetti, Ennio, 1998. "The Interaction of Implicit and Explicit Contracts in Repeated Agency," Games and Economic Behavior, Elsevier, vol. 23(1), pages 75-96, April.
    28. William Bentley MacLeod & Daniel Parent, 1998. "Job Characteristics and the Form of Compensation," CIRANO Working Papers 98s-08, CIRANO.
    29. Compte, Olivier, 2002. "On Failing to Cooperate When Monitoring Is Private," Journal of Economic Theory, Elsevier, vol. 102(1), pages 151-188, January.
    30. Gibbons, Robert & Waldman, Michael, 1999. "Careers in organizations: Theory and evidence," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 36, pages 2373-2437, Elsevier.
    31. Garvey, Gerald T., 1995. "Why reputation favors joint ventures over vertical and horizontal integration A simple model," Journal of Economic Behavior & Organization, Elsevier, vol. 28(3), pages 387-397, December.
    32. repec:eee:labchp:v:3:y:1999:i:pb:p:2291-2372 is not listed on IDEAS
    33. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June.
    34. Michihiro Kandori & Hitoshi Matsushima, 1998. "Private Observation, Communication and Collusion," Econometrica, Econometric Society, vol. 66(3), pages 627-652, May.
    35. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    36. Edward P. Lazear, 1999. "Output-based Pay: Incentives or Sorting?," NBER Working Papers 7419, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. James M. Malcomson, 2012. "Relational Incentive Contracts [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    2. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, vol. 93(1), pages 216-240, March.
    3. W. Bentley MacLeod, 2006. "Reputations, Relationships and the Enforcement of Incomplete Contracts," CESifo Working Paper Series 1730, CESifo.
    4. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    5. Joel Watson, 2021. "Theoretical Foundations of Relational Incentive Contracts," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 631-659, August.
    6. Ola Kvaløy & Trond E. Olsen, 2012. "The Rise of Individual Performance Pay," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(2), pages 493-518, June.
    7. Zhao, Rui R., 2012. "Renegotiation and conflict resolution in relational contracting," Games and Economic Behavior, Elsevier, vol. 75(2), pages 964-983.
    8. Elisabetta Iossa & Giancarlo Spagnolo, 2008. "Contracts as Threats: on a Rationale For Rewarding A while Hoping For B," EIEF Working Papers Series 1022, Einaudi Institute for Economics and Finance (EIEF), revised Dec 2010.
    9. Robert Gibbons, 2005. "Incentives Between Firms (and Within)," Management Science, INFORMS, vol. 51(1), pages 2-17, January.
    10. Ola Kvaløy & Trond E. Olsen, 2006. "Team Incentives in Relational Employment Contracts," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 139-170, January.
    11. Matthias Lang, 2023. "Stochastic contracts and subjective evaluations," RAND Journal of Economics, RAND Corporation, vol. 54(1), pages 104-134, March.
    12. Ricard Gil & Giorgio Zanarone, 2018. "On the determinants and consequences of informal contracting," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 27(4), pages 726-741, October.
    13. Sloof, Randolph & Sonnemans, Joep, 2011. "The interaction between explicit and relational incentives: An experiment," Games and Economic Behavior, Elsevier, vol. 73(2), pages 573-594.
    14. Schöttner, Anja, 2005. "Relational contracts and job design," SFB 649 Discussion Papers 2005-052, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    15. Anders Frederiksen & Elod Takats, 2004. "Optimal incentive mix of performance pay and efficiency wage," CERS-IE WORKING PAPERS 0418, Institute of Economics, Centre for Economic and Regional Studies.
    16. repec:hum:wpaper:sfb649dp2005-052 is not listed on IDEAS
    17. Robert Gibbons, 1998. "Incentives in Organizations," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 115-132, Fall.
    18. Vincenzo Scoppa, 2003. "Contratti incompleti ed enforcement endogeno. Una rassegna della letteratura," Economia politica, Società editrice il Mulino, issue 3, pages 391-440.
    19. W. Bentley MacLeod & Teck Yong Tan, 2016. "Optimal Contracting with Subjective Evaluation: The Effects of Timing, Malfeasance and Guile," NBER Working Papers 22156, National Bureau of Economic Research, Inc.
    20. Bingley, P. & Eriksson, T, 2001. "Pay Spread and Skewness. Employee Effort and Firm Productivity," Papers 01-2, Aarhus School of Business - Department of Economics.
    21. Cremer, Jacques & Khalil, Fahad, 1992. "Gathering Information before Signing a Contract," American Economic Review, American Economic Association, vol. 82(3), pages 566-578, June.
    22. , H. & ,, 2016. "Approximate efficiency in repeated games with side-payments and correlated signals," Theoretical Economics, Econometric Society, vol. 11(1), January.

    More about this item

    Keywords

    Repeated Moral Hazard; Private Monitoring; Efficiency Wages;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpga:0511007. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: EconWPA (email available below). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.