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Contracting and search with heterogeneous principals and agents

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  • Starmans, Jan

Abstract

This paper incorporates a risk-neutral principal-agent problem into a random search model to study contracting and search in general equilibrium. I introduce heterogeneity in principals' and agents' production technologies in terms of the distribution of output across states of nature. Under optimal contracting, this heterogeneity can give rise to complementarity in contracting between specific principal and agent types. In contrast to complementarity in production, complementarity in contracting affects only the division of the surplus but not its size and can induce principals to engage in overly intense search before forming a match. I show that a reduction in search frictions and contractual innovations can induce principals to engage in overly intense search.

Suggested Citation

  • Starmans, Jan, 2024. "Contracting and search with heterogeneous principals and agents," Journal of Economic Theory, Elsevier, vol. 217(C).
    • Handle: RePEc:eee:jetheo:v:217:y:2024:i:c:s0022053123001576
    DOI: 10.1016/j.jet.2023.105761
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    More about this item

    Keywords

    Moral hazard; Contract design; Search; Heterogeneous production technologies;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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