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Journal Article

Competition for Agency Contracts

R. Preston McAfee and John McMillan
The RAND Journal of Economics
Vol. 18, No. 2 (Summer, 1987), pp. 296-307
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/2555554
Page Count: 12
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Competition for Agency Contracts
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Abstract

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.

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