scholarly journals Relational Contracting, Negotiation, and External Enforcement

2020 ◽  
Vol 110 (7) ◽  
pp. 2153-2197
Author(s):  
Joel Watson ◽  
David A. Miller ◽  
Trond E. Olsen
Keyword(s):  
Equilibrium Path ◽  
Optimal Contract ◽  
Relational Contracting ◽  
Agent Model ◽  
Contractual Arrangements ◽  
Current Period ◽  
New Period ◽  
Principal Agent Model ◽  
Relative Bargaining Power

We study relational contracting and renegotiation in environments with external enforcement of long-term contractual arrangements. A long-term contract governs the stage games that the contracting parties will play in the future (depending on verifiable stage-game outcomes) until they renegotiate. In a contractual equilibrium, the parties choose their individual actions rationally, jointly optimize when selecting a contract, and exercise their relative bargaining power. Our main result is that in a wide variety of settings, the optimal contract is semi-stationary, with stationary terms for all future periods but special terms for the current period. In each period the parties renegotiate to this same contract. For example, in a simple principal-agent model with a choice of costly monitoring technology, the optimal contract specifies mild monitoring for the current period but intense monitoring for future periods. Because the parties renegotiate in each new period, intense monitoring arises only off the equilibrium path after a failed renegotiation. (JEL C73, C78, D23, D86)

Optimal Contracting with Subjective Evaluation

2003 ◽  
Vol 93 (1) ◽  
pp. 216-240 ◽  
Author(s):  
W. Bentley Macleod
Keyword(s):  
Subjective Evaluation ◽  
Efficiency Wages ◽  
Optimal Contract ◽  
Agent Model ◽  
Optimal Contracting ◽  
Bonus Pay ◽  
True Discrimination ◽  
Principal Agent Model ◽  
And Performance ◽  
The Right

This paper extends the standard principal–agent model to allow for subjective evaluation. The optimal contract results in more compressed pay relative to the case with verifiable performance measures. Moreover, discrimination against an individual implies lower pay and performance, suggesting that the extent of discrimination as measured after controlling for performance may underestimate the level of true discrimination. Finally, the optimal contract entails the use of bonus pay rather than the threat of dismissal, hence neither “efficiency wages” nor the right to dismiss an employee are necessary ingredients for an optimal incentive contract.

Double-sided moral hazard, information screening and the optimal contract

2016 ◽  
Vol 6 (4) ◽  
pp. 404-431 ◽  
Author(s):  
Jin Xue ◽  
Yiwen Fei
Keyword(s):  
Venture Capital ◽  
Moral Hazard ◽  
Capital Investment ◽  
Principal Agent ◽  
Optimal Contract ◽  
Fixed Income ◽  
Content Type ◽  
Agent Model ◽  
Venture Capital Investment ◽  
Principal Agent Model

Purpose In the practice of venture capital investment, the venture capital will not only claim the share of the enterprise’s future output, but also a certain amount of fixed income. The purpose of this paper is to examine the optimal contract which blends the variable ownership income and the fixed income theoretically so as to provide a keen insight into the venture capital practice. Design/methodology/approach This paper establishes an extended principal-agent model and researches on the design of optimal contract dominated by venture capital with double-sided moral hazard and information screening. Findings By establishing theoretical models, the main findings are: first, high-quality enterprise tends to relinquish less ownership but give more fixed return to the venture capital as compensation in order to obtain the venture capital financing; second, low-quality enterprise is willing to relinquish more ownership but give less fixed return to the venture capital for financing; third, due to the existence of double-sided moral hazard, neither of the venture capital and the enterprise will exert their best effort. Originality/value This paper furthers the application of principal-agent model in the field of venture capital investment and researches on the optimal contract, considering double-sided moral hazard and adverse selection at the same time originally.

scholarly journals A Solvable Dynamic Principal-Agent Model with Linear Marginal Productivity

2018 ◽  
Vol 2018 ◽  
pp. 1-17 ◽  
Author(s):  
Bing Liu ◽  
Zheng Yin ◽  
Chong Lai
Keyword(s):  
Optimization Problem ◽  
Principal Agent ◽  
Optimal Contract ◽  
Marginal Productivity ◽  
Information Structures ◽  
Agent Model ◽  
Time Dynamic ◽  
Main Effect ◽  
Principal Agent Model ◽  
Hidden Actions

We study how to design an optimal contract which provides incentives for agent to put forth the desired effort in a continuous time dynamic moral hazard model with linear marginal productivity. Using exponential utility and linear production, three different information structures, full information, hidden actions and hidden savings, are considered in the principal-agent model. Applying the stochastic maximum principle, we solve the model explicitly, where the agent’s optimization problem becomes the principal’s problem of choosing an optimal contract. The explicit solutions to our model allow us to analyze the distortion of allocations. The main effect of hidden actions is a reduction of effort, but the a smaller effect is on the consumption allocation. In the hidden saving case, the consumption distortion almost vanishes but the effort distortion is expanded. In our setting, the agent’s optimal effort is also reduced with the decline of marginal productivity.

scholarly journals Asymmetric awareness and heterogeneous agents

2020 ◽  
Vol 32 (4) ◽  
pp. 461-484
Author(s):  
Antoine Dubus
Keyword(s):  
Moral Hazard ◽  
Heterogeneous Agents ◽  
Contract Design ◽  
The Other ◽  
Principal Agent ◽  
Optimal Contract ◽  
Jel Codes ◽  
Agent Model ◽  
Principal Agent Model

We consider a principal-agent model with moral-hazard and asymmetric awareness and show how the heterogeneity of agents on their aversion to effort affects contract design. We discuss the optimal contract adopted when a principal is aware of all the impacts of an agent’s action, while agents ignore some of them. When a principal faces two types of agents, where one type is more effort-averse than the other, the equilibrium contract is shaped by agent proportions: it pools the agents, separates them, or excludes the more effort-averse agents from the contract. When efforts are observable, all the agents remain unaware, while when efforts are hidden, a principal increases the awareness of the agents to a level commensurate with the nature of the contract. JEL Codes – D82; D83; D86

scholarly journals Binary Payment Schemes: Moral Hazard and Loss Aversion

2010 ◽  
Vol 100 (5) ◽  
pp. 2451-2477 ◽  
Author(s):  
Fabian Herweg ◽  
Daniel Müller ◽  
Philipp Weinschenk
Keyword(s):  
Moral Hazard ◽  
Expected Utility ◽  
Loss Aversion ◽  
Reference Point ◽  
Performance Measure ◽  
Principal Agent ◽  
Optimal Contract ◽  
Agent Model ◽  
Payment Schemes ◽  
Principal Agent Model

We modify the principal-agent model with moral hazard by assuming that the agent is expectation-based loss averse according to Kőoszegi and Rabin (2006, 2007). The optimal contract is a binary payment scheme even for a rich performance measure, where standard preferences predict a fully contingent contract. The logic is that, due to the stochastic reference point, increasing the number of different wages reduces the agent's expected utility without providing strong additional incentives. Moreover, for diminutive occurrence probabilities for all signals the agent is rewarded with the fixed bonus if his performance exceeds a certain threshold. (JEL D82, D86, J41, M52, M12)

scholarly journals Decision Making for Principal-Agent Contracts in Intelligent Customization for New Energy Equipment

2019 ◽  
Vol 2019 ◽  
pp. 1-15 ◽  
Author(s):  
Fansheng Meng ◽  
Peng Song ◽  
Gang Zhao
Keyword(s):  
Cost Benefit ◽  
Principal Agent ◽  
Risk Avoidance ◽  
Multistage Model ◽  
Agent Model ◽  
New Energy ◽  
Principal Agent Model ◽  
Customer Trust ◽  
Energy Equipment

Intelligent manufacturing is a sustainable impetus to development of customization for new energy equipment. Reasonable principal-agent contract decision making can play a positive role in improving utility for customers and securing their long-term involvement. This paper establishes a multistage principal-agent model of intelligent customization for new energy equipment. The principal-agent and intelligent customization decisions, yielding risk avoidance and a better cost-benefit ratio, emerged from solving the model. A decision modification mechanism, used to improve intelligent customization output and consolidate customer trust, was proposed for agents. Research shows that overavoidance of customization risk by new energy equipment manufacturers reduces the efficiency of intelligent customization and aggravates the cost-benefit dilemma. Viewing intelligent customization as a long-term cooperative process, manufacturers can achieve a larger increase in equipment customization output at a smaller cost and enhance customer trust by adopting such a decision modification mechanism. The effect of this mechanism is obvious when the risk intensity is low. However, under the assumption of a multistage model, improvement of customer utility is mainly influenced by risk controllability. This paper provides solutions to the risk avoidance and cost-benefit dilemma problems of intelligent customization. The static principal-agent model was improved to a multistage model by setting the timeline. Long-term effectiveness of the decision modification mechanism was verified using this multistage model.

Dynamic Agency and Endogenous Risk-Taking

2019 ◽  
Vol 65 (9) ◽  
pp. 4032-4048 ◽  
Author(s):  
Tak-Yuen Wong
Keyword(s):  
Risk Taking ◽  
Continuous Time ◽  
Optimal Contract ◽  
Short Term ◽  
Private Benefit ◽  
Agent Model ◽  
Dynamic Agency ◽  
Principal Agent Model ◽  
Excessive Risk Taking ◽  
Excessive Risk

I study a continuous-time principal–agent model in which a multitasking agent engages in unobserved risk-taking. Risk-taking creates short-term profits but also increases the chance of large losses. The optimal contract incentivizes excessive risk-taking when the agent has insufficient skin in the game. Moreover, if the low effort is not too value-destroying and the private benefit of shirking is low enough, the principal can eliminate risk-taking by implementing the low effort. However, with variable project scale, addressing the risk-taking incentives by downsizing projects is not optimal. The implementation of the optimal contract shows that risk management should take agency problems into account. Complete hedging against downside risks provides incentives for the agent to gamble. This paper was accepted by Gustavo Manso, finance.

Why Were Workers Whipped? Pain in a Principal-Agent Model

1990 ◽  
Vol 100 (403) ◽  
pp. 1109 ◽  
Author(s):  
Michael Suk-Young Chwe
Keyword(s):  
Principal Agent ◽  
Agent Model ◽  
Principal Agent Model
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