Consider a strategic environment subject to moral hazard and adverse selection across multiple stages, with rich communication protocols. In this paper, we prove that for any allocation, there exist linear transfers to make it incentive compatible if and only if every undetectable deviation from honesty and obedience is unprofitable when the transfers equal zero, where ‘undetectable’ means that...

Developing economies share both microeconomic and macroeconomic characteristics which are often unique relative to their more developed counterparts. Indeed, many authors (e.g. Parente and Prescott 2000) have emphasized the role of institutional frictions within developing nations as a major determinant of economic growth (or the lack thereof). We examine one type of institutional friction, con...

The paper studies outside …nance in a model of two-dimensional moral hazard, involving risk choices as well as e¤ort choices. If the entrepreneur has insu¢ cient funds, a …rst-best outcome cannot be implemented. Second-best outcomes involve greater failure risk than …rstbest outcomes. For a Cobb-Douglas technology, second-best e¤ort and investment levels are smaller than …rst-best; for other te...

We investigate optimal managerial contracts in a principal-manager-employee hierarchy with a moral hazard problem at the bottom. We allow for collusion and extortion. Side contracting between manager and employee takes place before the employee has taken his action. Information is soft under collusion. If the manager's sole duty is to report information and if we focus on collusion plus extorti...

We propose a model of flexible trade agreements in which verifying the prevailing contingencies is possible but costly. Two types of flexibility emerge: contingent protection, which requires governments to verify the state of the world, and discretionary protection, which allows governments to set tariffs unilaterally. The structure of the GATT/WTO agreement provides these two types of flexibil...

This paper discusses the literature on the enforcement of incomplete contracts. It compares legal enforcement to enforcement via relationships and reputations. A number of mechanisms, such as the repeat purchase mechanism (Klein and Le er (1981)) and e ciency wages (Shapiro and Stiglitz (1984)), have been o ered as solutions to the problem of enforcing an incomplete contract. It is shown that t...

Should principals explain and justify their evaluations? In this paper the principal’s evaluation is private information, but she can provide some justifications by sending a costly message. Indeed, it is optimal for the principal to explain her evaluation to the agent if and only if the evaluation turns out to be bad. The justification guarantees the agent that the principal has not distorted ...

This paper examines the effects of an exogenous shift in the cost of contractual completeness induced by workload spikes on the endogenous selection of procurement terms. I conduct an instrumental-variable estimation of the causal effect of workload on contracting. In a sample of 150−thousand contracts from 85 civilian procurement offices over 11 years, increases in contracting officer workload...

When the quality of a good is at the discretion of the seller, how can buyers assure that the seller provides the mutually efficient level of quality? Contracts that provide a bonus to the seller if the quality is acceptable, or impose a penalty on the seller if quality is unacceptable, can in theory provide efficient incentives. But how are such contracts enforced? While the courts can be used...

We study two types of robust contracting problem under hidden action in continuous time. In type I problem, the principal is ambiguous about the project cash flows, while he is ambiguous about the agent’s beliefs in type II problem. The principal designs a robust contract that maximizes his utility under the worst-case scenario subject to the agent’s incentive and participation constraints. We ...