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Linear Contracts and the Double Moral-Hazard

Linear Contracts and the Double Moral-Hazard PDF Author: Son-Ku Kim
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Languages : en
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Book Description
This paper studies the characteristics of optimal contracts when the agent is risk-averse in the double moral-hazard situation in which the principal also participates in the production process. It is already known that a simple linear contract is one of many optimal contracts under the double moral-hazard when the agent is risk-neutral. We find that the agent's optimal incentive scheme in this case is unique and non-linear, but less sensitive to output than would be designed under a single moral-hazard. We also find that the linear contract is not robust in the sense that the above unique and non-linear contract does not approach the linear contract as the agent's risk-aversion approaches zero.
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