Dynamic contractual incentives in the face of a Samaritans’s dilemma

Miquel-Florensa, Josepa (2013) Dynamic contractual incentives in the face of a Samaritans’s dilemma. Theory and Decision, 74 (1). pp. 151-166.

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Official URL: http://tse-fr.eu/pub/26562


We design a project funding contract that provides optimal incentives to agents, in a setting where both principal and agent enjoy the benefits of the project in a non-rival form once completed but may differ in their valuation. To do so, we study optimal incentive payments in a dynamic principal-agent framework in which the principal cannot observe the agent’s investment, but only completed projects, and faces a Samaritan’s Dilemma: he cannot commit to terminate the contract before completion of the project. The agent decides whether to undertake a (discrete) investment or consume all received funds. We find that the optimal contract is stationary, and that either transfers equal to investment cost are incentive compatible or the cost of the contract is decreasing with the agent’s valuation of the projects. Given the intrinsic valuation of the project by the agent, he is always better off signing the contract in contraposition with the general moral hazard result.

Item Type: Article
Language: English
Date: January 2013
Refereed: Yes
JEL codes: D82 - Asymmetric and Private Information
D86 - Economics of Contract - Theory
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:31
Last Modified: 07 Mar 2018 13:22
OAI ID: oai:tse-fr.eu:26562
URI: http://publications.ut-capitole.fr/id/eprint/15445

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