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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27864
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| Title: | Tractability and Detail-Neutrality in Incentive Contracting |
| Authors: | Gabaix, Xavier
Edmans, Alex |
| Issue Date: | 3-Feb-2009 |
| Series/Report no.: | FIN-08-019 |
| Abstract: | This paper identifies a broad class of situations in which the contract
is both attainable in closed form and "detail-neutral". The
contract's functional form is independent of the noise distribution and
reservation utility; moreover, when the cost of effort is pecuniary, the
contract is linear in output regardless of the agent's utility function.
Our contract holds in both continuous time and a discrete-time, multi-
period setting where action follows noise in each period. The tractable
contracts of Holmstrom and Milgrom (1987) can thus be achieved in
settings that do not require exponential utility, Gaussian noise or
continuous time. Our results also suggest that incentive schemes need
not depend on complex details of the particular setting, a number of
which (e.g. agent's risk aversion) are difficult for the principal to
observe. The proof techniques use the notion of relative dispersion and
subdifferentials to avoid relying on the first-order approach, and may
be of methodological interest. |
| URI: | http://hdl.handle.net/2451/27864 |
| Appears in Collections: | Finance Working Papers
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