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Optimally Coarse Contracts
We study a principal-agent model with imperfectly contractible actions and a cost of determining what is contractible. If contractibility costs satisfy a monotonicity property—-implied by any arbitrarily small difficulty in distinguishing actions when writing the contract—-then optimal contracts are necessarily coarse, specifying finitely many actions out of a continuum. By contrast, costs of enforcing a contract affect allocations but yield complete contracts. We provide first-order conditions that describe the structure of optimally coarse contracts. Applying these results, the model rationalizes discrete pay grades in employment contracts. The presence of private information about productivity coarsens the optimal pay scale.
Date:
1 November 2024, 14:15
Venue:
Manor Road Building, Manor Road OX1 3UQ
Venue Details:
Seminar Room G or https://zoom.us/j/93867615769?pwd=T1NsTEVwNE40R3pEVW9yTlBicG1mdz09
Speaker:
Joel Flynn (Yale University)
Organising department:
Department of Economics
Part of:
Nuffield Economic Theory Seminar
Booking required?:
Not required
Audience:
Members of the University only
Editor:
Edward Valenzano
