Consider a principal-agent relationship in which more effort by the agent raises the likelihood of success. Does rewarding success, i.e., paying a bonus, increase effort in this case? I find that bonuses have not only an incentive but also an income effect. Overall, bonuses paid for success may...

We introduce uncertainty into Holmstrom and Milgrom (1987) to study optimal long-term contracting with learning. In a dynamic relationship, the agent's shirking not only reduces current performance but also increases the agent’s information rent due to the persistent belief manipulation...

In this paper, we construct a joint production model of health with two-sided asymmetric information and ask the question, "How should physicians be compensated?" We demonstrate theoretically that the preferred physician compensation scheme depends on the illness condition. Outcome-contingent...

This article surveys the literature on principal-agent problems with moral hazard that gained popularity following the seminal works of Mirrlees (1976), Holmström (1979), and others. This literature is concerned with designing incentives to motivate one or more workers—typically by paying for...

Consider a principal-agent relationship in which more effort by the agent raises the likelihood of success. Does rewarding success, i.e., paying a bonus, increase effort in this case? I find that bonuses have not only an incentive but also an income effect. Overall, bonuses paid for success may...

Directors and supervisory board members (officers) are increasingly being held personally liable. Directors & Officers (D&O) liability insurance offers directors and supervisory board members ample protection against directors' and officers' liability. On the one hand, this has many advantages...

We examine how the reputation concern of contracting parties affects contractual incentives if information is transmitted to the public through contract litigation. In a career concern framework, the performance of the long-lived seller is revealed to future buyers only if contractual disputes...

The literature on moral licensing usually considers two sequential moral decisions such as lying and donating which involve no real effort. We complement this literature by substituting the second stage with a real-effort task. Subjects first decide whether to take money designated for charity...