Simple menus of cost-based contracts with monotone optimal effort Academic Article

abstract

• AbstractThis paper extends the fixedprice costreimbursement (FPCR) menu by allowing the agent's costreducing optimal effort to be monotone in the agent's cost type. We show that the performance of the optimal FPCR menu relies crucially on the monotonicity of optimal effort. In particular, in an optimal FPCR menu, if the optimal effort is increasing in type and only a portion of cost types are induced to exert effort, the performance of the optimal FPCR menu can be very poor relative to the fully optimal contract. Our results suggest that in designing an optimal FPCR menu it is important for the principal to take into account the cost structure or, more exactly, the monotonicity of optimal effort in type.

authors

• An, Yonghong

published proceedings

• JOURNAL OF PUBLIC ECONOMIC THEORY

author list (cited authors)

• An, Y., & Zhang, D.

citation count

• 1

complete list of authors

• An, Yonghong||Zhang, Daiqiang

publication date

• October 2018

publisher

• Wiley  Publisher

published in

• Journal of Public Economic Theory  Journal

keywords

• 38 Economics
• 3803 Economic Theory

Digital Object Identifier (DOI)

• 10.1111/jpet.12302

start page

• 742

end page

• 756

volume

• 20

issue

• 5

URL

• http://dx.doi.org/10.1111/jpet.12302