Skip navigation

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.
Appears in Collections:Finance Working Papers

Files in This Item:
File Description SizeFormat 
wpa08019.pdf358.28 kBAdobe PDFView/Open

Items in FDA are protected by copyright, with all rights reserved, unless otherwise indicated.