The Interaction of Implicit and Explicit Contracts in Repeated Agency

In a repeated principal–agent model in which the agent's actions are observable to the principal but not verifiable in court, the agent's incentives derive both from salary payments based on verifiable signals and from implicit promises by the principal of bonuses for good behavior. Explic...

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Bibliographic Details
Published inGames and economic behavior Vol. 23; no. 1; pp. 75 - 96
Main Authors Pearce, David G, Stacchetti, Ennio
Format Journal Article
LanguageEnglish
Published Elsevier Inc 01.04.1998
Elsevier
SeriesGames and Economic Behavior
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Summary:In a repeated principal–agent model in which the agent's actions are observable to the principal but not verifiable in court, the agent's incentives derive both from salary payments based on verifiable signals and from implicit promises by the principal of bonuses for good behavior. Explicit short-term contracts are designed to enhance the effectiveness of the infinite-horizon implicit contract between principal and agent. In a constrained-efficient equilibrium, bonuses smooth the consumption path of the risk-averse agent by moving in the opposite direction from salaries, total consumption, and expected discounted utility for the rest of the game.Journal of Economic LiteratureClassification Numbers: C7, C73, D8.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0899-8256
1090-2473
DOI:10.1006/game.1997.0607