Toward a General Theory of Commitment, Renegotiation and Contract Incompleteness : (II) Commitment Problem and Optimal Incentive Schemes in Agency with Bilateral Moral Hazard

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This paper investigates the characteristics of the optimal incentive contracts when the principal is also a productive agent. In this bilateral moral hazard framework, the two requirements should be satisfied in designing an incentive scheme. One is the agent's incentive provision and the other is the principal's incentive provision. Because of the trade off between these two incentive provisions, only the second best is obtainable if the incentive contract should be based only on the total output as in the small profit sharing firms. We show that the simple linear sharing rule often observed in the real world achieves such a second best efficiency. Last, we present an example and provide a simple but interesting comparative statics results on the incentive schemes.
法政大学の論文
1998-07-30