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Nonlinear Contracts, Zero Profits and Moral Hazard

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  • Fishe, Raymond P H
  • McAfee, R Preston

Abstract

Contracts that base payments on an ex post variable are examined. It is shown that a quadratic contract form may elicit truthful responses from auction participants and offer zero expected profits to the winning bidder, but not eliminate adverse incentives ex post. A general impossibility theorem is proven. This theorem establishes that, regardless of functional form, no contract can offer zero expected profits and resolve the ex post moral hazard problem. Copyright 1987 by The Review of Economic Studies Limited.

Suggested Citation

  • Fishe, Raymond P H & McAfee, R Preston, 1987. "Nonlinear Contracts, Zero Profits and Moral Hazard," Economica, London School of Economics and Political Science, vol. 54(213), pages 97-101, February.
    • Handle: RePEc:bla:econom:v:54:y:1987:i:213:p:97-101
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    Cited by:

    1. Zou, L., 1989. "Ownership structure and efficiency : An incentive mechanism approach," Discussion Paper 1989-55, Tilburg University, Center for Economic Research.
    2. Zou, L., 1989. "Ownership structure and efficiency : An incentive mechanism approach," Other publications TiSEM 14b0756c-17d9-4b9e-92cd-b, Tilburg University, School of Economics and Management.
    3. Wei-Shiun Chang & Bo Chen & Timothy C. Salmon, 2015. "An Investigation of the Average Bid Mechanism for Procurement Auctions," Management Science, INFORMS, vol. 61(6), pages 1237-1254, June.

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