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Optimal Subjective Contracting with Revision

Author

Listed:
  • Xinhao He

    (HKU Business School, the University of Hong Kong, HKSAR, China; Guanghua School of Management, Peking University, Beijing 100871, China)

  • Jin Li

    (HKU Business School, the University of Hong Kong, HKSAR, China)

  • Zhaoneng Yuan

    (HKU Business School, the University of Hong Kong, HKSAR, China)

Abstract

We study the optimal contracting problem with subjective evaluation when the principal can ask the agent to revise his work. The possibility of revision benefits the principal by providing the option value of making another attempt at the work. However, it also introduces a new type of incentive problem for the principal: she may ask for revision even if it is inefficient to do so. This new incentive issue for the principal also affects the incentive of the agent: he may procrastinate his effort in anticipation of excessive revision. This results in a trilemma: The optimal contract cannot simultaneously provide for efficient revision, efficient effort, and minimal ex post surplus destruction. The optimal contract will of necessity contain at least one of the following problems: revision , the principal asks for excessive revision; procrastination , the agent shirks in the early stage; or punishment , excessive surplus destruction at low-quality final output.

Suggested Citation

  • Xinhao He & Jin Li & Zhaoneng Yuan, 2022. "Optimal Subjective Contracting with Revision," Management Science, INFORMS, vol. 68(8), pages 6346-6354, August.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:8:p:6346-6354
    DOI: 10.1287/mnsc.2022.4418
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    References listed on IDEAS

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