Incentive contracts with unobservable competence levels
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Incentive contracts with unobservable competence levels. / Davis, Jerome; Keiding, Hans.
In: Open Economics Journal, Vol. 1, 2008, p. 47-54.Research output: Contribution to journal › Journal article › Research › peer-review
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TY - JOUR
T1 - Incentive contracts with unobservable competence levels
AU - Davis, Jerome
AU - Keiding, Hans
PY - 2008
Y1 - 2008
N2 - A contract where the agent is compensated ex post only upon satisfactory performance, often called a no-cureno- pay contract, can arise as under several circumstances. In this paper, we model the problem of contractual choice as a principal-agent contract which is modified due to hidden information about the competence of the agent to fulfill the obligations of the contract. The agent offers a choice of contracts to the principal, thereby signalling agent competence to the principal, and there is no alternative reputation mechanism to the contract for the principal's bargaining strategy. It turns out that in this situation, the optimal contract will have a form which may be recognized as a no-cure-no-pay contract.
AB - A contract where the agent is compensated ex post only upon satisfactory performance, often called a no-cureno- pay contract, can arise as under several circumstances. In this paper, we model the problem of contractual choice as a principal-agent contract which is modified due to hidden information about the competence of the agent to fulfill the obligations of the contract. The agent offers a choice of contracts to the principal, thereby signalling agent competence to the principal, and there is no alternative reputation mechanism to the contract for the principal's bargaining strategy. It turns out that in this situation, the optimal contract will have a form which may be recognized as a no-cure-no-pay contract.
U2 - 10.2174/1874919400801010047
DO - 10.2174/1874919400801010047
M3 - Journal article
VL - 1
SP - 47
EP - 54
JO - The Open Economics Journal
JF - The Open Economics Journal
SN - 1874-9194
ER -
ID: 6109132