Flexible Contracts

DSpace/Manakin Repository

Show simple item record

dc.contributor.author GOTTARDI, Piero
dc.contributor.author TALLON, Jean Marc
dc.contributor.author GHIRARDATO, Paolo
dc.date.accessioned 2009-09-09T15:01:24Z
dc.date.available 2009-09-09T15:01:24Z
dc.date.issued 2009
dc.identifier.issn 1725-6704
dc.identifier.uri http://hdl.handle.net/1814/12384
dc.description.abstract This paper studies the costs and benefits of delegating decisions to superiorly informed agents relative to the use of rigid, non discretionary contracts. Delegation grants some flexibility in the choice of the action by the agent, but also requires the use of an appropriate incentive contract so as to realign his interests with those of the principal. The parties’ understanding of the possible circumstances in which actions will have to be chosen and their attitude towards risk and uncertainty play then an important role in determining the costs of delegation. The main focus of the paper lies indeed in the analysis of these costs and the consequences for whether or not delegation is optimal. We determine and characterize the properties of the optimal flexible contract both when the parties have sharp probabilistic beliefs over the possible events in which the agent will have to act and when they only have a set of such beliefs. We show that the higher the agent’s degree of risk aversion, the higher the agency costs for delegation and hence the less profitable is a flexible contract versus a rigid one. The agent’s imprecision aversion in the case of multiple priors introduces another, additional agency costs; it again implies that the higher the degree of imprecision aversion the less profitable flexible contracts versus rigid ones. Even though, with multiple priors, the contract may be designed in such a way that principal and agent end up using ’different beliefs’ and hence engage in speculative trade, this is never optimal, in contrast with the case where the parties have sharp heterogeneous beliefs. en
dc.language.iso en en
dc.relation.ispartofseries EUI ECO en
dc.relation.ispartofseries 2009/34 en
dc.subject Delegation en
dc.subject Flexibility en
dc.subject Agency Costs en
dc.subject Multiple Priors en
dc.subject Imprecision Aversion en
dc.subject D86 en
dc.subject D82 en
dc.subject D81 en
dc.subject D43
dc.title Flexible Contracts en
dc.type Working Paper en
dc.neeo.contributor TALLON|Jean Marc|aut|
dc.neeo.contributor TALLON|Jean-Marc|aut|
dc.neeo.contributor TALLON|Jean Marc|aut|
dc.neeo.contributor TALLON|Jean-Marc|aut|
dc.neeo.contributor GHIRARDATO|Paolo|aut|
dc.neeo.contributor GHIRARDATO|Paolo|aut|
dc.neeo.contributor GHIRARDATO|Paolo|aut|
dc.neeo.contributor GHIRARDATO|Paolo|aut|
eui.subscribe.skip true


Files in this item

This item appears in the following Collection(s)

Show simple item record