Journal article
Optimal Contracts when Enforcement is a Decision Variable
Econometrica, Vol.68(1), pp.119-134
01/2000
DOI: 10.1111/1468-0262.00095
Abstract
This paper analyzes choice-theoretic costly enforcement in an intertemporal contracting model with a differentially informed investor and entrepreneur. An intertemporal contract is modeled as a mechanism in which there is limited commitment to payment and enforcement decisions. The goal of the analysis is to characterize the effect of choice-theoretic costly enforcement on the structure of optimal contracts. The paper shows that simple debt is the optimal contract when commitment is limited and costly enforcement is a decision variable (Theorem 1). In contrast, stochastic contracts are optimal when agents can commit to the ex-ante optimal decisions (Theorem 2). The paper also shows that the costly state verification model can be viewed as a reduced form of an enforcement model in which agents choose payments and strategies as part of a perfect Bayesian Nash equilibrium.
Details
- Title: Subtitle
- Optimal Contracts when Enforcement is a Decision Variable
- Creators
- Stefan Krasa - Dept. of Economics, University of Illinois, USAAnne P Villamil - Dept. of Economics, University of Illinois, USA
- Resource Type
- Journal article
- Publication Details
- Econometrica, Vol.68(1), pp.119-134
- Publisher
- Blackwell Publishers Ltd
- DOI
- 10.1111/1468-0262.00095
- ISSN
- 0012-9682
- eISSN
- 1468-0262
- Number of pages
- 16
- Language
- English
- Date published
- 01/2000
- Academic Unit
- Economics
- Record Identifier
- 9984083815802771
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