This paper shows that, by adding a limited liability constraint to a standard relational contract model with imperfect public monitoring, one can obtain de…nitive empirical implications of optimal relational contracts that shed light on important features of employment relationship. First and foremost, the employment dynamics has an “up-or-out”property. An employee begins the employment relatio...

Tournaments have been objected as resulting from ad hoc restrictions to the contracting problem which are not easily justified. Taking into account that a performance measure might not be verifiable to a third party, however, a restriction to payments which sum up to a constant may be reasonable. The paper analyzes such fixed payment schemes with regard to their optimality and the relation to t...

We study a dynamic mechanism design problem in which a buyer seeks to procure an item from a single seller in multiple periods. The seller is privately informed about her procurement cost at each period, and this cost may be serially correlated over time. We restrict the buyer to use mechanisms satisfying a limited liability constraint: the seller’s flow payoffs must be non-negative at each per...

We analyze the role of relative performance evaluation when a principal has several agents, who face correlated shocks. If limited liability constraints are binding, relative performance evaluation may be of no value if the principal is restricted to symmetric contracts. However, with asymmetric contracts, where agents are induced to choose different effort levels, relative performance measures...

Optimum utilization of limited resources in the production floor demands that the production manager makes decisions on the best allocation of limited resources. This study applied linear programming techniques to production planning problem in a feed mill producing company. Linear Programming model was formulated based on data obtained from the company operations’ diary. Data was processed wit...

We solve the general problem of optimal risk sharing among a finite number of agents with limited liability. We show that the optimal allocation is characterized by endogenously determined ranks assigned to the participating agents and a hierarchical structure of risk sharing, where all agents take on risks only above the agent-specific thresholds determined by their ranks. When all agents have...

* Subject to the usual disclaimer, the authors would like to thank an anonymous referee of this journal for helpful comments and suggestions. ABSTRACT: The literature on interlinkage is inconclusive regarding the strict superiority of this arrangement. We analyze a landlord and a moneylender as two players making non-cooperative decisions regarding the terms of their respective contracts with a...

Under a market setting, we analyse the impact of legal liability on prevention, taking into account the possible limited wealth of ...rms. We show that under strict liability, ...rms may choose ex ante not to be able to fully indemnify victims ex post: whatever the market structure, they may use limited liability strategically by investing in prevention in excess of what is socially optimal. Th...