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Competition for Agency Contracts
R. Preston McAfee and John McMillan
The RAND Journal of Economics
Vol. 18, No. 2 (Summer, 1987), pp. 296-307
Stable URL: http://www.jstor.org/stable/2555554
Page Count: 12
You can always find the topics here!Topics: Economic theory, Moral hazard models, Adverse selection, Auctions, Risk aversion, Moral hazard, Prices, Royalty payments, Spreading risk, Marginal costs
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This article introduces a market for the services of agents into a principal-agent model. The principal and the potential agents are risk neutral. The contract trades off adverse selection against moral hazard. In a broad range of circumstances the optimal contract is linear in the outcome. In an incentive-compatible contract the more able is an agent, the larger is his contractual share of his marginal output; thus, a more able agent is induced to work at a rate closer to the first-best.
The RAND Journal of Economics © 1987 RAND Corporation