Should principals explain and justify their evaluations? In this paper the principal's evaluation is private information, but she can provide justification by sending a costly cheap-talk message. I show that the principal explains her evaluation to the agent if the evaluation turns out to be...

Can formal contracts help resolving the holdup problem? We address this important question by studying the holdup problem in repeated transactions between a seller and a buyer in which the seller can make relation-specific investments in each period. In contrast to previous findings, we...

We prove the existence of Pareto optimal allocations within sets of acceptable allocations when decision makers have probabilistic sophisticated variational preferences defined on random endowments in L1. Pareto optimal allocations, variational preferences, probabilistic sophistication,...

This paper discusses the literature on the enforcement of incomplete contracts. It compares legal enforcement to enforcement via relationships and reputations. A number of mechanisms, such as the repeat purchase mechanism (Klein and Leffler (1981)) and efficiency wages (Shapiro and Stiglitz...

We consider a double-sided moral hazard problem where each party can renege on the signed contract since there does not exist any verifi- able performance signal. It is shown that ex-post litigation can restore incentives of the agent. Moreover, when the litigation can be settled by the parties...

Gaming is an important problem when firms use a nonlinear incentive contract. Previous empirical researches show that gaming reduces firm's profit. This paper derives the cost of gaming in a dynamic moral hazard model and show that this cost is higher when the employee is more productive....

We examine the nature of contracts that optimally reward innovations in a risky environment, when the innovator is privately informed about the quality of her innovation and must engage an agent to develop it. We model the innovator as a principal who has private but imperfect information about...

This paper examines the power of different contractual mechanisms to influence an originator's choice of costly effort to screen borrowers when the originator plans to securitise its loans. The analysis focuses on three potential mechanisms: the originator holds a "vertical slice", or share of...

Traditionally insurance agents are incentivised by payment of a commission on the premium they generate. A bonus payment received by the agent from the insurer, when the insured does not make a claim, is referred to as ‘No claim bonus' (NCB). NCB rewards the agent for her / his effort in...