Fixed wages and bonuses in agency contracts: the case of a continuous state space

In this paper, we extend the state-contingent production approach to principal-agent problems to the case where the state space is an atomless continuum. The approach is modelled on the treatment of optimal tax problems. The central observation is that, under reasonable conditions, the optimal contract may involve a fixed wage with a bonus for above-normal performance. This is analogous to the phenomenon of 'bunching' at the bottom in the optimal tax literature.


Issue Date:
Jun 22 2004
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/151165
Total Pages:
15
JEL Codes:
D21; D82
Series Statement:
Risk and Uncertainty Program
6/R04




 Record created 2017-04-01, last modified 2017-08-27

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