Linear Contracts and the Double Moral-Hazard
Author | : Son-Ku Kim |
Publisher | : |
Total Pages | : 38 |
Release | : 2003 |
ISBN-10 | : OCLC:1290391916 |
ISBN-13 | : |
Rating | : 4/5 (16 Downloads) |
Book excerpt: This paper studies the characteristics of optimal contracts when the agent is risk-averse in the double moral-hazard situation in which the principal also participates in the production process. It is already known that a simple linear contract is one of many optimal contracts under the double moral-hazard when the agent is risk-neutral. We find that the agent's optimal incentive scheme in this case is unique and non-linear, but less sensitive to output than would be designed under a single moral-hazard. We also find that the linear contract is not robust in the sense that the above unique and non-linear contract does not approach the linear contract as the agent's risk-aversion approaches zero.