CFDP 892

The Interaction of Implicit and Explicit Contracts in Repeated Agenc

Author(s):

Publication Date: December 1988

Pages: 30

Abstract:

Traditional agency theory assumes that the principal has no more information about the agent’s actions than the enforcement authorities have. This is unrealistic in many settings, and in repeated models, additional information possessed by the principal changes the nature of the problem. Such information can be used in implicit, self-enforcing contracts between principal and agent, that supplement the usual explicit contracts. This paper studies the way in which the two kinds of contracts are combined in constrained eﬀicient equilibria of the agency supergame. The agent’s compensation is comprised of both guaranteed payments and voluntary bonuses from the principal. We give a simple characterization of the composition of remuneration in the optimal dynamic scheme.

Keywords:

Principal-agent theory, Contracts, Supergames, Dynamic models

JEL Classification Codes: 022, 026

Note:

Published in Games and Economic Behavior (April 1998), 23(1): 75-96 [DOI]