Title: Moral Hazard with Limited Liability: Incentive Contracting Under Monotone Ratio Assumptions
Abstract:This paper studies the optimal contract for a risk-neutral agency with limited liability. We introduce a novel formulation of the model, in which the contract design problem reduces to a problem of co...This paper studies the optimal contract for a risk-neutral agency with limited liability. We introduce a novel formulation of the model, in which the contract design problem reduces to a problem of constructing the distribution function of a random variable. This formulation directly balances the principal's tradeoff between incentivizing the agent to exert proper effort and minimizing the cost of the agent's compensation. We show that the optimal contract may involve one or two tiers of performance-based bonuses. We obtain new sufficient conditions for the optimality of bonus contracts and provide new insights into the choice of contract parameters.Read More
Publication Year: 2011
Publication Date: 2011-01-01
Language: en
Type: article
Indexed In: ['crossref']
Access and Citation
Cited By Count: 1
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot