Timing of Payment

Abstract

Traditionally, contract design focus on finding optimal price schedule to induce effort, but the timing of payment is not discussed. In the simplest Principal-Agent model, agent is paid to provide good or service, which quality depends on his effort. Principal also has the choice of amount to pay. Noted the actual choice need not be the agreed total between the two parties. So here we have a two sided moral hazard problem. On one side, as long studied, principal worry agent to shrink. While on the other side, agent worry that principal not paying the agreed amount. This paper attempts to find the optimal pricing arrangement, including the timing.