Optimal Share Contracts with Moral Hazard on Effort and in Output Reporting: Managing the Double Laffer Curve Effect

Posted: 24 Jun 2008

See all articles by Alain de Janvry

Alain de Janvry

University of California, Berkeley - The Richard & Rhoda Goldman School of Public Policy

Elisabeth Sadoulet

University of California, Berkeley - The Richard & Rhoda Goldman School of Public Policy

Date Written: April 2007

Abstract

We explore in this paper the design of optimal share contracts when there is a double moral hazard, one on inputs exclusively provided by the agent (such as effort) and the other in reporting the level of output to be shared with the principal, and when there is a social efficiency cost to under-reporting. The optimal contract is second best in that it allows for residual moral hazard in both effort and output reporting. The model predicts that contract terms will vary with the value to the tenant of unreported output as well as with any capacity of the principal to directly supervise the agent. The model is written for a landlord-tenant share contract but applies as well for tax collection and franchising.

Keywords: JEL classifications: D02, D82, L14

Suggested Citation

de Janvry, Alain and Sadoulet, Elisabeth, Optimal Share Contracts with Moral Hazard on Effort and in Output Reporting: Managing the Double Laffer Curve Effect (April 2007). Oxford Economic Papers, Vol. 59, Issue 2, pp. 253-274, 2007, Available at SSRN: https://ssrn.com/abstract=1150585 or http://dx.doi.org/10.1093/oep/gpl034

Alain De Janvry (Contact Author)

University of California, Berkeley - The Richard & Rhoda Goldman School of Public Policy ( email )

2607 Hearst Avenue
Berkeley, CA 94720-7320
United States

Elisabeth Sadoulet

University of California, Berkeley - The Richard & Rhoda Goldman School of Public Policy ( email )

2607 Hearst Avenue
Berkeley, CA 94720-7320
United States

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