Title: Simple Contracts under Observable and Hidden Actions

Speaker: Bo Chen, Southern Methodist University

Time: October 10th, 2017 13:30–15:00

Venue: Conference Room 106, Zhonghui Building (College of Economics, JNU) 

About the speaker:

Bo Chen is an Associate Professor at Southern Methodist University (Dallas, TX). He received PhD in Economics from the University of Wisconsin-Madison in 2007. Bo Chen's research interests include repeated games, mechanism design and matching problems.

Abstract:

We consider a general framework for multitask moral hazard problems with observable and hidden actions. Ideally, the principal in our framework can design optimal contracts that depend on both observable (and verifiable) actions and realized outcomes. Given a mild assumption on the existence of a punishment scheme, we identify a general equivalence result, dubbed the "forcing principle,"which states that every optimal contract in our framework is strategically equivalent to a simple forcing contract that is essentially outcome-contingent. The forcing contract only specifies an outcome-contingent reward scheme and an action profile, and the agent receives the outcome-contingent reward only if he follows the recommended observable actions (and is otherwise punished severely). The forcing principle has useful implications: It confers analytic advantage for the existence and computation of optimal contracts in our setting. It also highlights the importance of the existence of the punishment scheme in characterizing frrst-best benchmarks in moral hazard problems, which is typically ignored in the literature.