We develop a dynamic principal–agent model to show how imperfect public information and asymmetric beliefs, asymmetric risk attitudes, complementary actions by both parties, and inter-temporal adverse selection arising from the agent’s unobservable actions interact to affect optimal dynamic contracts. Our continuous-time formulation of the model, which features both “hidden actions” and “hidden...

This paper studies incentives in a dynamic contracting framework of a levered firm. In particular, the manager selects long-term and short-term efforts, while shareholders choose initially optimal leverage and ex-post optimal default policies. There are three results. First, shareholders trade off the benefits of short-termism (current cash flows) against the benefits of higher growth from long...

Bonus Culture: Competitive Pay, Screening, and Multitasking This paper analyzes the impact of labor market competition and skill-biased technical change on the structure of compensation. The model combines multitasking and screening, embedded into a Hotelling-like framework. Competition for the most talented workers leads to an escalating reliance on performance pay and other high-powered incen...

Consumers have shown a willingness to pay a premium for products labeled as “Fair Trade,” and to prefer retailers that are seen as more generous to their suppliers/employees. A fair trade product is essentially a bundle of a base product and a donation to the supplier (e.g., a coffee farmer). An altruistic rational consumer will only choose this bundle if doing so is less expensive than buying ...

In a multi-agent setting, individuals often compare own performance with that of their peers. These comparisons in‡uence agents’ incentives and lead to a noncooperative game, even if the agents have to complete independent tasks. I show that depending on the interplay of the peer e¤ects, agents’ e¤orts are either strategic complements or strategic substitutes. I solve for the optimal monetary i...

The notion of contracts as reference points provides the basis for a deeper understanding of important phenomena such as the employment contract, vertical integration, firm scope, authority, and delegation. Previous experiments lend support to this notion but they ignore realistic aspects of trading relationships such as informal agreements and ex-post renegotiation or revision. Here we show th...

This paper studies the optimal design of delegation rule in a three-tier principalintermediary-agent hierarchy. In this hierarchy, monetary transfer is not feasible, delegation is made sequentially, and all players are strategic. We characterize the optimal delegation mechanism. It is shown that the singleinterval delegation a la Holmstrom is optimal only when the intermediary is moderately bia...

Developing economies share both microeconomic and macroeconomic characteristics which are often unique relative to their more developed counterparts. Indeed, many authors (e.g. Parente and Prescott 2000) have emphasized the role of institutional frictions within developing nations as a major determinant of economic growth (or the lack thereof). We examine one type of institutional friction, con...

The paper studies outside …nance in a model of two-dimensional moral hazard, involving risk choices as well as e¤ort choices. If the entrepreneur has insu¢ cient funds, a …rst-best outcome cannot be implemented. Second-best outcomes involve greater failure risk than …rstbest outcomes. For a Cobb-Douglas technology, second-best e¤ort and investment levels are smaller than …rst-best; for other te...

We investigate optimal managerial contracts in a principal-manager-employee hierarchy with a moral hazard problem at the bottom. We allow for collusion and extortion. Side contracting between manager and employee takes place before the employee has taken his action. Information is soft under collusion. If the manager's sole duty is to report information and if we focus on collusion plus extorti...