Incentive-based pay is rational, intuitive, and popular. Agency theory tells us that a principal seeking to align its incentives with an agent's should be able to simply pay the agent to achieve the principal's desired results. Indeed, this strategy has long been used across diverse industries-from executive compensation to education, professional sports to public service-but with mixed results...

The paper considers collective agreements that are signed by a government agency and an industry which have an energy saving target. The target achievement is observable, but the energy saving actions undertaken by firms in the industry are not. We consider such agreements as firm contracts that depend on whether the industry complies with the target or not. We show that first best regulation c...

Standard contract theory assumes that the principal holds all of the bargaining power. By implementing alternating o¤er and strategic delay, we transform the one-shot contracts design game into the in…nite-horizon contracts bargaining game. The uninformed principal and the informed agent bargain over multiple dimensions. Our paper presents the following new results. When the di¤erence between t...

Efficiency under contractual incompleteness often requires voluntary cooperation in situations where self-regarding incentives for contractual compliance are present as well. Here we provide a comprehensive experimental analysis based on the gift-exchange game of how explicit and implicit incentives affect cooperation. We first show that there is substantial cooperation under non-incentive comp...

Standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced. This paper studies the design of self-enforced relational contracts. I show that optimal contracts often can take a simple stationary form, but that self-enforcement restricts promised compensation and affects incentive provision. With hidden informa...

This paper studies a dynamic agency problem which includes limited liability, moral hazard and adverse selection. The paper develops a robust approach to dynamic contracting based on calibrating the payoffs that would have been delivered by simple benchmark contracts that are attractive but infeasible, due to limited liability constraints. The resulting dynamic contracts are detail-free and sat...

We show experimentally that fairness concerns may have a decisive impact on the actual and optimal choice of contracts in a moral hazard context. Bonus contracts that offer a voluntary and unenforceable bonus for satisfactory performance provide powerful incentives and are superior to explicit incentive contracts when there are some fair-minded players. But trust contracts that pay a generous w...

This paper reviews the significant progress in “agency theory” (i.e., the economic theory of incentives) during the 1990s, with a special focus on applications to supply transactions. I emphasize six recent models, in three pairs: (1) new foundations for the theory of incentive contracts, (2) new directions in incentive theory, and (3) new applications to supply transactions. By reviewing these...