Journal Article

Optimal Contracting with Private Knowledge of Wealth and Ability

Tracy R. Lewis and David E. M. Sappington

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 68, issue 1, pages 21-44
Published in print January 2001 | ISSN: 0034-6527
Published online January 2001 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00158
Optimal Contracting with Private Knowledge of Wealth and Ability

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We examine the optimal design of contracts when an agent is privately informed about his wealth, his ability, and his effort supply. We find that the agent's wealth and ability act as perfect complements in determining the power of the incentive scheme under which he operates. Only if his ability and his wealth both increase can an agent be assured of operating under a more powerful scheme. Consequently, severe under-utilization of wealth and ability arise in equilibrium.

Journal Article.  0 words. 

Subjects: Economics

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