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Implementing high‐powered contracts to motivate intertemporal effort supply
Author(s) -
Chu Leon Yang,
Sappington David E.M.
Publication year - 2009
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.1756-2171.2009.00066.x
Subject(s) - moral hazard , adverse selection , principal (computer security) , microeconomics , economics , production (economics) , information asymmetry , selection (genetic algorithm) , risk neutral , actuarial science , business , incentive , computer science , computer security , artificial intelligence
We characterize the optimal contract between a principal and a risk‐neutral, wealth‐constrained agent when an adverse selection problem follows a moral hazard problem. The optimal contract in this setting often is more steeply sloped for the largest output levels than is the optimal contract in either the standard moral hazard setting or the standard adverse selection setting. The large incremental rewards for exceptional performance motivate the agent to deliver substantial effort both before and after he acquires privileged information about the production environment.