Optimal stationary contract with two-sided imperfect enforcement and persistent adverse selection

David Martimort (1, 2) , Aggey Semenov (3) , Lars Stole (4)

1 PSE - Paris School of Economics
2 PJSE - Paris Jourdan Sciences Economiques
3 University of Ottawa [Ottawa]
4 Booth School of Business [Chicago]

We consider an infinitely-repeated principal–agent relationship run with stationary contracts. The agent has private information on his persistent cost parameter and, under limited enforcement, both parties can breach the contract. The optimal stationary contract with limited enforcement is made of two distinct pieces. For the most efficient types of the agent, the contract entails bunching with a fixed payment and a fixed output. For less efficient types, the contract exhibits downward output distortions below the Baron–Myerson level that would have been achieved had enforcement been costless.

Mots clés: Contract enforcement; Optimal control; Adverse selection; Stationary contract

Domaines: Economies et finances

David Martimort, Aggey Semenov, Lars Stole. Optimal stationary contract with two-sided imperfect enforcement and persistent adverse selection. Economics Letters, 2017, 159, pp.18-22. ⟨10.1016/j.econlet.2017.07.007⟩. ⟨halshs-01630253⟩