We analyze a two-period agency problem with limited liability and nonverifiable information. The principal commits to a dynamic bonus pool comprising a fixed total payment that may be distributed over time to the agent and a third party. We find that the optimal two-period contract features...

The problem of designing tournament contracts under limited liability and alternative performance measures is considered. Under risk neutrality, only the best-performing agent receives an extra premium if the liability constraint becomes binding. Under risk aversion, more than one prize is...

I examine how a firm’s opportunity to verify information influences the joint use of verifiable and unverifiable information for incentive contracting. I employ a simple two-period agency model, in which contract frictions arise from limited liability and the potential unverifiability of...