Contracting with Wealth-Constrained Agents

Posted: 12 Oct 2000

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 how a project owner optimally selects a project operator and motivates him to deliver an essential noncontractible input (e.g., effort) when potential operators are privately informed about their limited wealth. Truthful revelation of wealth is induced by promising a higher probability of operation and, if necessary, a greater share of realized profit the larger the nonrefundable bond that a potential operator posts. The project owner benefits when total wealth is widely dispersed among potential operators. Under plausible conditions, limited knowledge of wealth is not constraining for the project owner.

Suggested Citation

Lewis, Tracey R. and Sappington, David E. M., Contracting with Wealth-Constrained Agents. International Economic Review, Vol. 41, No. 3, August 2000, Available at SSRN: https://ssrn.com/abstract=241868

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 )

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

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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