Optimal Incentive Contracts With Bonus Caps.
This article investigates contracts between two risk‐neutral parties with bounded bonus payments. If the available signal about the agent's behavior satisfies a novel condition, the monotone likelihood ratio transformation property, the optimal contract takes a simple form irrespective of whether th...
| Publicado en: | RAND Journal of Economics (Wiley-Blackwell) Vol. 56; no. 1; pp. 55 - 74 |
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| Autores principales: | , |
| Formato: | Artículo |
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Wiley-Blackwell
Spring2025
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| Materias: | |
| Acceso en línea: | Ver este registro en EBSCOhost |
| Sumario: | This article investigates contracts between two risk‐neutral parties with bounded bonus payments. If the available signal about the agent's behavior satisfies a novel condition, the monotone likelihood ratio transformation property, the optimal contract takes a simple form irrespective of whether the first‐order approach (FOA) is valid or not. The contract rewards the agent the maximum bonus if the signal's likelihood ratio exceeds a threshold, which in contrast to the FOA contract is not necessarily zero. We next derive a condition for a signal to enhance the efficiency of a contract. Applications in relational contracting and law enforcement illustrate our findings. |
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