INCENTIVES AND STANDARDS IN AGENCY CONTRACTS

This paper studies the structure of state-contingent contracts in the presence of moral hazard and multi-tasking. Necessary and sufficient conditions for the presence of multi-tasking to lead to fixed payments instead of incentive schemes are identified. It is shown that the primary determinant of whether multi-tasking leads to higher or lower powered incentives is the role that noncontractible outputs play in helping the agent deal with the production risk associated with the observable and contractible outputs. When the noncontractible outputs are socially undesirable and risk substitutes, standards are never optimal. If the noncontractible outputs are socially desirable, standards are never optimal if the noncontractible outputs play a risk-complementary role.


Issue Date:
2000
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/28605
Total Pages:
33
JEL Codes:
D82; L23; L50
Series Statement:
Working Paper WP 00-18




 Record created 2017-04-01, last modified 2017-04-04

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