Penalizing Success in Dynamic Incentive Contracts: No Good Deed Goes Unpunished?

RAND JOURNAL OF ECONOMICS, Vol 28 No 2

Posted: 15 Oct 1997

See all articles by Tracy R. Lewis

Tracy R. Lewis

Duke University, Fuqua School of Business-Economics Group; National Bureau of Economic Research (NBER); Duke University - Department of Economics; Duke Innovation & Entrepreneurship Initiative

David E. M. Sappington

University of Florida - Department of Economics; National Bureau of Economic Research (NBER)

Abstract

We examine optimal dynamic incentive contracts when adverse selection and moral hazard problems are present. We find that early success is optimally penalized in the sense that the agent who succeeds early subsequently faces a lower- powered incentive contract. Penalizing success in this manner serves to limit the agent's initial incentive to understate his ability.

JEL Classification: D80, D82

Suggested Citation

Lewis, Tracey R. and Sappington, David E. M., Penalizing Success in Dynamic Incentive Contracts: No Good Deed Goes Unpunished?. RAND JOURNAL OF ECONOMICS, Vol 28 No 2, Available at SSRN: https://ssrn.com/abstract=10821

Tracey R. Lewis (Contact Author)

Duke University, Fuqua School of Business-Economics Group ( email )

Box 90097
Durham, NC 27708-0097
United States

National Bureau of Economic Research (NBER)

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Duke University - Department of Economics ( email )

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Duke Innovation & Entrepreneurship Initiative ( email )

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David E. M. Sappington

University of Florida - Department of Economics ( email )

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352-336-1420 (Fax)

National Bureau of Economic Research (NBER)

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