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Abstract

This paper examines the influence of type-dependent reservation utility on the optimality of linear contracts in a Principal-Agent model of procurement. Type-dependency of reservation utility, combined with the requirements of individual rationality and incentive compatibility in the principal's contracts induces a countervailing incentive effect, the strength of which depends on an index of quality or degree of competition that the agent would face in an external private market. The results show how the curvature of the reservation utility dictates whether the optimal contracts can be implemented with a menu of linear contracts, and how the magnitude of the private market index
influences the net-transfer rule.

Item Type:	Report (Discussion Paper)
Authors/Creators:	Evans, SB
Keywords:	Linear Contracts, Countervailing Incentives, Type Dependent Reservation Utility, repec
Publisher:	School of Economics and Finance, University of Tasmania
Additional Information:	© 2010 University of Tasmania and the author
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