On the Performance of Linear Contracts

35 Pages Posted: 16 Mar 2011

See all articles by Arup Bose

Arup Bose

Indian Statistical Institute, Kolkata - Statistics and Mathematics Unit

Debashis Pal

University of Cincinnati - Department of Economics

David E. M. Sappington

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

Date Written: February 24, 2011

Abstract

We examine the ability of linear contracts to replicate the performance of optimal unrestricted contracts in the canonical moral hazard setting with a wealth constrained, risk averse agent. We find that in a broad class of environments, the principal can always secure with a linear contract at least 95% of the profit that she secures with an optimal unrestricted contract, provided the productivity of the agent's effort is not too meager.

Suggested Citation

Bose, Arup and Pal, Debashis and Sappington, David E. M., On the Performance of Linear Contracts (February 24, 2011). Journal of Economics & Management Strategy, Vol. 20, Issue 1, pp. 159-193, 2011, Available at SSRN: https://ssrn.com/abstract=1782523 or http://dx.doi.org/10.1111/j.1530-9134.2010.00286.x

Arup Bose (Contact Author)

Indian Statistical Institute, Kolkata - Statistics and Mathematics Unit ( email )

India

Debashis Pal

University of Cincinnati - Department of Economics ( email )

Carl H. Lindner Hall 2925 Campus Green Drive
PO Box 0371
Cincinnati, OH 45221-0211
United States

David E. M. Sappington

University of Florida - Department of Economics ( email )

224 Matherly Hall
Gainesville, FL 32611-7140
United States
352-392-3904 (Phone)
352-336-1420 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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