Calibrated Incentive Contracts

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Abstract

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 incentive properties of simple benchmark contracts that are attractive but infeasible, due to limited liability constraints. The resulting dynamic contracts are detail-free and satisfy robust performance bounds independently of the underlying process for returns, which need not be i.i.d. or even ergodic.

Original languageEnglish (US)
Pages (from-to)1935-1971
Number of pages37
JournalEconometrica
Volume81
Issue number5
DOIs
StatePublished - Sep 2013

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Approachability
  • Detail-free contracts
  • Dynamic contracts
  • High-watermark contracts
  • Robust contracts

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