Article

Payoff Implications of Incentive Contracting

Daniel F. Garrett

Abstract

In the context of a canonical agency model, we study the payoff implications of introducing optimally-structured incentives. We do so from the perspective of an analyst who does not know the agent's preferences for responding to incentives, but does know that the principal knows them. We provide, in particular, tight bounds on the principal's expected benefit from optimal incentive contracting across feasible values of the agent's expected rents. We thus show how economically relevant predictions can be made robustly given ignorance of a key primitive.

Keywords

Asymmetric information; mechanism design; robustness, procurement;

JEL codes

  • D82: Asymmetric and Private Information • Mechanism Design

Replaces

Daniel F. Garrett, Payoff Implications of Incentive Contracting, TSE Working Paper, n. 20-1140, September 2020.

Reference

Daniel F. Garrett, Payoff Implications of Incentive Contracting, Theoretical Economics, vol. 16, n. 4, 2021, p. 1281–1312.

Published in

Theoretical Economics, vol. 16, n. 4, 2021, p. 1281–1312