Calibrated Incentive Contracts


  • Sylvain Chassang

    1. Dept. of Economics, Princeton University, Princeton, NJ 08544, U.S.A.;
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    • I'm indebted to Abhijit Banerjee, Roland Benabou, Faruk Gul, Stephen Morris, Wolfgang Pesendorfer, David Sraer, and Satoru Takahashi for time, encouragement, and advice. I thank the co-editor and several anonymous referees for substantial help in revising the paper. I am grateful to Manuel Amador, Bruno Biais, Markus Brunnermeier, Mike Golosov, Johannes Hörner, Augustin Landier, Thomas Mariotti, Ulrich Müller, Guillaume Plantin, Esteban Rossi-Hansberg, Adam Szeidl, Juuso Toikka, Wei Xiong, Rakesh Vohra, Muhamet Yildiz, and John Zhu for many useful conversations. The paper greatly benefited from seminar audiences at the 2012 AEA meetings, Berkeley, the Institute for Advanced Study, Harvard, LSE, MIT, Microsoft New England, Northwestern, NYU, NYU Stern, Paris School of Economics, Penn State, Princeton, Toulouse School of Economics, Sciences Po Paris, UCL, Warwick, Wisconsin, X-HEC, and Yale. SeHyoun Ahn and Juan Ortner provided excellent research assistance.


This paper studies a dynamic agency problem which includes limited liability, moral hazard, and adverse selection. The paper develops a robust approach to dynamic contracting based on calibrating the incentive properties of simple benchmark contracts that are attractive but infeasible, due to limited liability constraints. The resulting dynamic contracts are detail-free and satisfy robust performance bounds independently of the underlying process for returns, which need not be i.i.d. or even ergodic.