We thank the editor and two anonymous referees for very helpful comments and suggestions.
Implementing high-powered contracts to motivate intertemporal effort supply
Article first published online: 4 MAY 2009
© 2009, RAND
The RAND Journal of Economics
Volume 40, Issue 2, pages 296–316, Summer 2009
How to Cite
Chu, L. Y. and Sappington, D. E.M. (2009), Implementing high-powered contracts to motivate intertemporal effort supply. The RAND Journal of Economics, 40: 296–316. doi: 10.1111/j.1756-2171.2009.00066.x
- Issue published online: 4 MAY 2009
- Article first published online: 4 MAY 2009
We characterize the optimal contract between a principal and a risk-neutral, wealth-constrained agent when an adverse selection problem follows a moral hazard problem. The optimal contract in this setting often is more steeply sloped for the largest output levels than is the optimal contract in either the standard moral hazard setting or the standard adverse selection setting. The large incremental rewards for exceptional performance motivate the agent to deliver substantial effort both before and after he acquires privileged information about the production environment.