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  • Simple Contracts

    Rights statement: The final publication is available at Springer via http://dx.doi.org/10.1007/s00199-019-01187-7

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Simple Contracts under Observable and Hidden Actions

Research output: Contribution to Journal/Magazine › Journal article › peer-review

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Simple Contracts under Observable and Hidden Actions. / Chen, Bo ; Chen, Yu; Rietzke, David Michael.
In: Economic Theory, Vol. 69, 01.06.2020, p. 1023-1047.

Research output: Contribution to Journal/Magazine › Journal article › peer-review

Harvard

Chen, B, Chen, Y & Rietzke, DM 2020, 'Simple Contracts under Observable and Hidden Actions', Economic Theory, vol. 69, pp. 1023-1047. https://doi.org/10.1007/s00199-019-01187-7

APA

Chen, B., Chen, Y., & Rietzke, D. M. (2020). Simple Contracts under Observable and Hidden Actions. Economic Theory, 69, 1023-1047. https://doi.org/10.1007/s00199-019-01187-7

Vancouver

Chen B, Chen Y, Rietzke DM. Simple Contracts under Observable and Hidden Actions. Economic Theory. 2020 Jun 1;69:1023-1047. Epub 2019 Mar 28. doi: 10.1007/s00199-019-01187-7

Author

Chen, Bo ; Chen, Yu ; Rietzke, David Michael. / Simple Contracts under Observable and Hidden Actions. In: Economic Theory. 2020 ; Vol. 69. pp. 1023-1047.

Bibtex

@article{2b10b22e6aeb47efab6d5f0bdb4cc58b,
title = "Simple Contracts under Observable and Hidden Actions",
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, which 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 analytical advantage for the existence and computation of optimal contracts in our setting. It also highlights and makes explicit the importance of the existence of the punishment scheme in characterizing first-best benchmarks in moral hazard problems.",
keywords = "First-Best Benchmark, Forcing Contract, Forcing Principal, Moral Hazard, Observable Actions",
author = "Bo Chen and Yu Chen and Rietzke, {David Michael}",
note = "The final publication is available at Springer via http://dx.doi.org/10.1007/s00199-019-01187-7",
year = "2020",
month = jun,
day = "1",
doi = "10.1007/s00199-019-01187-7",
language = "English",
volume = "69",
pages = "1023--1047",
journal = "Economic Theory",
issn = "0938-2259",
publisher = "Springer-Verlag,",

}

RIS

TY - JOUR

T1 - Simple Contracts under Observable and Hidden Actions

AU - Chen, Bo

AU - Chen, Yu

AU - Rietzke, David Michael

N1 - The final publication is available at Springer via http://dx.doi.org/10.1007/s00199-019-01187-7

PY - 2020/6/1

Y1 - 2020/6/1

N2 - 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, which 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 analytical advantage for the existence and computation of optimal contracts in our setting. It also highlights and makes explicit the importance of the existence of the punishment scheme in characterizing first-best benchmarks in moral hazard problems.

AB - 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, which 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 analytical advantage for the existence and computation of optimal contracts in our setting. It also highlights and makes explicit the importance of the existence of the punishment scheme in characterizing first-best benchmarks in moral hazard problems.

KW - First-Best Benchmark

KW - Forcing Contract

KW - Forcing Principal

KW - Moral Hazard

KW - Observable Actions

U2 - 10.1007/s00199-019-01187-7

DO - 10.1007/s00199-019-01187-7

M3 - Journal article

VL - 69

SP - 1023

EP - 1047

JO - Economic Theory

JF - Economic Theory

SN - 0938-2259

ER -