Econometrica: Sep 2013, Volume 81, Issue 5

Calibrated Incentive Contracts

https://doi.org/10.3982/ECTA9987
p. 1935-1971

Sylvain Chassang

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.

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Supplemental Material

Supplement to "Calibrated Incentive Contracts"

This supplement provides several extensions as well as simulations illustrating key properties of calibrated contracts.  In particular, extensions show how to allow for time discounting, describe a broader class of high-liability contracts that can be successfully calibrated under limited liability, and explore contract performance when the agent isn't fully rational.

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