On the Performance of Linear Contracts |
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| Authors: | Arup Bose Debashis Pal David E M Sappington |
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| Institution: | 1. Indian Statistical Institute203 B. T. RoadKolkata 700108, Indiaabose@isical.ac.in;2. Department of EconomicsUniversity of CincinnatiCincinnati, OH 45221debashis.pal@uc.edu;3. Department of EconomicsUniversity of FloridaPO Box 117140Gainesville, FL 32611sapping@ufl.edu |
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| Abstract: | We examine the ability of linear contracts to replicate the performance of optimal unrestricted contracts in the canonical moral hazard setting with a wealth constrained, risk averse agent. We find that in a broad class of environments, the principal can always secure with a linear contract at least 95% of the profit that she secures with an optimal unrestricted contract, provided the productivity of the agent's effort is not too meager. |
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