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Contracting Under Unverifiable Monetary Costs

Authors
  • Quérou, Nicolas
  • Soubeyran, Antoine
  • Soubeyran, Raphael
Publication Date
Jan 01, 2020
Identifiers
DOI: 10.1111/jems.12389
OAI: oai:HAL:hal-02866383v1
Source
HAL-Descartes
Keywords
Language
English
License
Green
External links

Abstract

We consider a contracting relationship where the agent's effort induces monetary costs, and limits on the agent's resource restrict his capability to exert effort. We show that, the principal finds it best to offer a sharing contract while providing the agent with an up-front financial transfer only when the monetary cost is neither too low nor too high. Thus, unlike in the limited liability literature, the principal might find it optimal to fund the agent. Moreover, both incentives and the amount of funding are non-monotonic functions of the monetary cost. These results suggest that an increase in the interest rate may affect the form of contracts differently , depending on the initial level of the former. Using the analysis, we provide and discuss several predictions and policy implications.

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