Robust Incentive Contracts
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4448-03.pdf
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223.08 KB
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Adobe PDF
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2e53c7eaf7aae8c14167223ce027164b
Author(s)
Wernerfelt, Birger
Date Issued
February 13, 2004
Series/Report no.
MIT Sloan School of Management Working Paper;4448-03
Abstract
We look at a principal-agent model in which the agent has to perform an action, the difficulty of which is better known ex interim than ex ante. We compare two contracting regimes; one with commitment to an ex ante negotiated contract, and one with an ex interim negotiated contract. The ex ante contract can not be too steep, but attempts to negotiate a steeper ex interim contract may result in bargaining failure. We find that the relative efficiency of the two contracting regimes depends on the nature of the differences between tasks. In a dynamic version of the analysis, we further find that the comparison depends on the frequency with which new tasks are needed. The argument can be interpreted as an analysis of the tradeoff between weak incentives in the firm and the possibility of unsuccessful negotiations in the market
Subjects
Theory of the Firm
Employment
Adjustments
Adaptation
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