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On the Performance of Linear Contracts

On the Performance of Linear Contracts We examine the ability of linear contracts to replicate the performance of optimal unrestricted contracts in the canonical moral hazard setting with a wealth constrained, risk averse agent. We find that in a broad class of environments, the principal can always secure with a linear contract at least 95% of the profit that she secures with an optimal unrestricted contract, provided the productivity of the agent's effort is not too meager. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economics & Management Strategy Wiley

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References (37)

Publisher
Wiley
Copyright
© 2011 Wiley Periodicals, Inc.
ISSN
1058-6407
eISSN
1530-9134
DOI
10.1111/j.1530-9134.2010.00286.x
Publisher site
See Article on Publisher Site

Abstract

We examine the ability of linear contracts to replicate the performance of optimal unrestricted contracts in the canonical moral hazard setting with a wealth constrained, risk averse agent. We find that in a broad class of environments, the principal can always secure with a linear contract at least 95% of the profit that she secures with an optimal unrestricted contract, provided the productivity of the agent's effort is not too meager.

Journal

Journal of Economics & Management StrategyWiley

Published: Mar 1, 2011

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