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Mitigating Non-contractible actions by randomness

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  • Roland Strausz

Abstract

This paper studies non-contractibility of a contract designer's actions in an agency model with costly monitoring. It shows that non-contractibility may lead to an explicit randomness, which is not optimal under full contractibility. The randomness mitigates non-contractibility. Its effectiveness increases with the ex post deducibility of the non-contractible variable. Mitigation is perfect, if the non-contractible action can be deduced perfectly from other contractible variables. Consequently, non-contractibility is less severe than some recent literature indicates.

Suggested Citation

  • Roland Strausz, "undated". "Mitigating Non-contractible actions by randomness," Papers 003, Departmental Working Papers.
    • Handle: RePEc:bef:lsbest:003
    as

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    File URL: http://userpage.fu-berlin.de/%7Elsbester/papers/d1998_21.pdf
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    References listed on IDEAS

    as
    1. Frøystein Gjesdal, 1982. "Information and Incentives: The Agency Information Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(3), pages 373-390.
    2. Roland Strausz, 1997. "Delegation of Monitoring in a Principal-Agent Relationship," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(3), pages 337-357.
    3. Kim C. Border & Joel Sobel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(4), pages 525-540.
    4. Dilip Mookherjee & Ivan Png, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 399-415.
    5. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
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    More about this item

    Keywords

    incomplete contracting; random signals; stochastic contracts; non-contractible monitoring;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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