Decision Sciences
8 years ago

Optimal contracts distorted, leading to inefficient bonus rewards in agency model.

Journal of Economic Theory
Ex post participation constraint in a principal–agent model with adverse selection and moral hazard
Sandrine Ollier, Lionel Thomas

Paper Summary

The study looks at how to make fair contracts when one person knows more than the other and can hide their effort. They found that giving bonuses for good work should be lower than what's best to keep everyone happy.

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