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On the Performance of Linear Contracts

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  • Arup Bose
  • Debashis Pal
  • David E. M. Sappington

Abstract

We examine the ability of linear contracts to replicate the performance of optimal unrestricted contracts in the canonical moral hazard setting with a wealth constrained, risk averse agent. We find that in a broad class of environments, the principal can always secure with a linear contract at least 95% of the profit that she secures with an optimal unrestricted contract, provided the productivity of the agent's effort is not too meager.

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  • Arup Bose & Debashis Pal & David E. M. Sappington, 2011. "On the Performance of Linear Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(1), pages 159-193, March.
    • Handle: RePEc:bla:jemstr:v:20:y:2011:i:1:p:159-193
    DOI: 10.1111/j.1530-9134.2010.00286.x
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    17. Garrett, Daniel F., 2014. "Robustness of simple menus of contracts in cost-based procurement," Games and Economic Behavior, Elsevier, vol. 87(C), pages 631-641.
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