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- Title
When vagueness induces indirect competition: strategic incompleteness of contracts.
- Authors
Roy, Jaideep; Serfes, Konstantinos
- Abstract
A class of employment contracts entailing production targets and consequent rewards is studied. In a nondiscriminatory environment, a principal hiring many agents faces the problem of writing a common contract which induces the highest possible effort from each one of his agents. While a very high target may get the best out of highly skilled agents, low skilled ones tend to shirk. On the other hand, although low targets make every agent put positive effort, there are efficiency losses from the high skilled agents. Also, in such environments the principal often has better information regarding the skills of all his agents than what each agent has regarding the rest of the agents at work. We show that if skills of agents are sufficiently close, the informed principal earns strictly higher profits by offering incomplete contracts as against being specific, as incomplete contracts reduce flow of information and induce indirect competition amongst agents.
- Subjects
INFORMATION resources; INCOMPLETE contracts; CONTRACTS; EMPLOYMENT; LABOR contracts
- Publication
Economic Theory, 2002, Vol 20, Issue 3, p603
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-001-0234-y