CRIEFF Discussion Paper
Number 0911
Multi-agent contracting with countervailing incentives and limited
liability
Daniel Danau and Annalisa Vinella
Abstract
We consider a principal who deals with two
privately informed agents protected by limited liability. Their technologies
are such that the fixed costs decline with the marginal costs (the types), which
are correlated. Because of these technological features, agents display
countervailing incentives to misrepresent type. We show that, with high
liability, the first-best outcome can be effected for
any type if (1) the fixed cost is non-concave in type, under the contract that
yields the smallest feasible loss to agents; (2) the fixed cost is not very
concave in type, under the contract that yields the maximum sustainable loss to
agents. We further show that, with low liability, the first-best outcome is
still implemented for a non-degenerate range of types if the fixed cost is less
concave in type than some given threshold, which tightens as the liability
reduces. The optimal contract entails pooling otherwise.
JEL
Classifications: D82
Keywords: Countervailing incentives;
Limited liability; Correlation; Pooling
Back to
CRIEFF Discussion Papers list