Calibrated Incentive Contracts
Econometrica · 2013 · Volume 81 · Issue 5
Abstract
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.
Keywords
Detail-free contracts, dynamic contracts, robust contracts, high-watermark contracts, approachability
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