Essays on contract theory and organizational economics

Chapter 1 develops a non-parametric methodology for identifying contract optimality in the presence of moral hazard. Following the first order approach, a standard method of computing optimal contracts, the paper first proves two theoretical properties of the solutions to the moral hazard problem. First, we show that the profit loss (relative to the optimal contract) for given effort level has a unique lower bound. The second property is an equivalence between the first order condition (Mirrlees-Holmstrom Condition) and the Cramer-Rao Lower Bound (CRLB). These two properties provide the foundations for (1) identifying optimality, and (2) performing statistical inference on the agent's primitives based on an observed sequence of pairs of outputs and payments. The paper shows that under some weak conditions, contract optimality is identified, as long as the output generating process is additive in effort and noise. Identification does not require the agent's effort to be observed by the principal or the econometrician, and requires no knowledge of (1) the details of the contract, (2) the agent's cost of effort, (3) the agent's monetary utility, or (4) the distribution of output. Based on the approach proposed in this paper, we test contract optimality for a piece-rate contract, and estimate bounds on the profit loss for cotton weavers in Zhejiang Province, China. Chapter 2 develops a new method to justify the validity of the first order approach (FOA). We first prove that checking the validity amounts to checking the existence of a fixed point of the agent's best response against a Mirrlees-Holmstrom (MH) class contract offered by the principal, given some specifications of complemetary conditions.

Department dc:contributor.department

Massachusetts Institute of Technology. Dept. of Economics.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2009

Author dc:creator

• Ke, Rongzhu

Advisor dc:contributor.advisor

• Bengt Holmstrom, Victor Chernozhukov and Panle Jia.

• Economics.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/54639

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/54639