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DYNAMIC INCENTIVE CONTRACTS UNDER NO COMMITMENT TO PERIODIC AUDITING AND A RETROSPECTIVE PENALTY SYSTEM *
Author(s) -
CHEN HSIAOCHI
Publication year - 2006
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/j.1467-9957.2006.00488.x
Subject(s) - pooling , economics , incentive , principal (computer security) , microeconomics , audit , mathematical economics , pareto principle , computer science , operations management , management , artificial intelligence , operating system
This study extends Khalil's ( RAND Journal of Economics , Vol. 28 (1997), No. 4, pp. 629–640) model to a multiperiod one under no principal's commitment to periodic auditing and a retrospective penalty system. The optimal dynamic contracts may not exist. When they exist, there is no sure first‐period auditing and either the first‐best or a single contract is offered in the second period. The Khalil‐type (1997) and Baron–Myerson‐type ( Econometrica , Vol. 50 (1982), No. 4, pp. 911–930) contracts could serve the first‐period contracts of the hybrid and separating equilibria, respectively. However, optimal dynamic contracts cannot be duplicated by these static contracts. Finally, players may prefer our pooling equilibrium to Laffont and Tirole's ( European Economic Review , Vol. 31 (1987), No. 4, pp. 901–926). And the pooling equilibrium may weakly Pareto dominate the separating one.