COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 892 "The Integration of Implicit and Explicit Contracts in Repeated Agency" David G. Pearce and Ennio Stacchetti December 1988 Traditional agency theory assumes that the principal has no more information about the agent's actions than the enforcement authorities have. This is unrealistic in many settings, and in repeated models, additional information possessed by the principal changes the nature of the problem. Such information can be used in implicit, self-enforcing contracts between principal and agent, that supplement the usual explicit contracts. This paper studies the way in which the two kinds of contracts are combined in constrained efficient equilibria of the agency supergame. The agent's compensation is comprised of both guaranteed payments and voluntary bonuses from the principal. We give a simple characterization of the composition of remuneration in the optimal dynamic scheme. JE Classification: 022, 026 Keywords: Principal-agent theory, contracts, supergames, dynamic models |
