SFB 303 Discussion Paper No. A-432

Author: Schweizer, Urs
Title: Contract-Specific Environments Leading to Unsophisticated Contracts
Abstract: Given that moral hazard seems omnipresent, one might expect that many more contractual relationships should be governed by sophisticated incentive schemes than what we actually observe. By propagating the purely contract-theoretic approach, the present paper identifies contract-specific environments for the hidden action problem under which contracts that promise, at no incentives whatsoever, a flat rate to the agent cannot be outperformed by more sophisticated arrangements. Optimum contracts, however, are sometimes plagued by multiple equilibria. The paper reinforces Gale's and Hellwig's findings that a rather severe conflict between the game-theoretic and the contract-theoretic criterion should more carefully be taken into account than most authors currently do.
Keywords: Unsophisticated contracts, hidden action, equilibrium selection
JEL-Classification-Number: D23
Creation-Date: Februar 1994
URL: ../1994/a/bonnsfa432.pdf

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