Date: 2011
Type: Working Paper
Flexible contracts
Working Paper, EUI ECO, 2011/26
GOTTARDI, Piero, TALLON, Jean-Marc, GHIRARDATO, Paolo, Flexible contracts, EUI ECO, 2011/26 - https://hdl.handle.net/1814/18096
Retrieved from Cadmus, EUI Research Repository
This paper studies the costs and benefits of delegating decisions to superiorly informed agents relative to the use of rigid, non discretionary contracts. The main focus of the paper lies in the analysis of the costs of delegation, primarily agency costs, versus their benefits, primarily the flexibility of the action choice. We first determine and characterize the properties of the optimal flexible contract. We then show that the higher the agent’s degree of risk aversion, the higher is the agency costs of delegation and the less profitable a flexible contract relative to a rigid one. When the parties to not have sharp probability beliefs, the agent’s degree of imprecision aversion introduces another agency cost, which again reduces the relative profitability of flexible contracts.
Cadmus permanent link: https://hdl.handle.net/1814/18096
ISSN: 1725-6704
Series/Number: EUI ECO; 2011/26
Publisher: European University Institute
Keyword(s): Delegation Flexibility Agency cost Multiple priors Imprecision aversion D86 D82 D81