Premium
On the Performance of Linear Contracts
Author(s) -
Bose Arup,
Pal Debashis,
Sappington David E. M.
Publication year - 2011
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2010.00286.x
Subject(s) - moral hazard , replicate , productivity , profit (economics) , principal (computer security) , microeconomics , class (philosophy) , economics , econometrics , incentive , mathematical economics , computer science , mathematics , statistics , artificial intelligence , computer security , macroeconomics
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.