Contract-Based Motivation for Keeping Records of a Manager's Reporting and Budgeting History
Anil Arya, John C. Fellingham, Richard A. Young
Management Science · 1994 · Volume 40 · Issue 4
Abstract
This paper analyzes the role of the agent's bankruptcy constraints in multiperiod principal-agent models with asymmetric information. Conditions are provided under which commitment to a long-term contract involving N rounds of investment improves upon repetition of N identical single-period contracts. Further, when the agent's reservation wage is sufficiently low the optimal contract is always long term. Keeping records of a manager's history of reporting activity facilitates contracting, since optimal contracts may require a link between past reports and future investments over a duration of two or more periods.
Keywords
long-term contracts, agency theory, capital rationing, organizational slack
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