Moral hazard with limited liability: Random-variable formulation and optimal contract structures

• 成果类型: Article
• 署名作者: Wang, Wenbin; Hu, Shanshan
• 署名单位: Shanghai University of Finance & Economics
• 刊物名称: GAMES AND ECONOMIC BEHAVIOR
• ISSN/ISSBN: 0899-8256
• DOI: 10.1016/j.geb.2021.01.002
• 发表日期: 2021
• 页码: 374-386
• 关键词: Moral hazard; Risk-neutral agency; limited liability; first-order approach; Pay-for-performance

摘要

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. (C) 2021 Elsevier Inc. All rights reserved.