Optimality of linearity with collusion and renegotiation
Barlo, Mehmet and Özdoğan, Ayça (2011) Optimality of linearity with collusion and renegotiation. [Working Paper / Technical Report] Sabanci University ID:SU_FASS_2011/0008
This study analyzes a continuous-time N-agent Brownian hidden-action model with exponential utilities, in which agents' actions jointly determine the mean and the variance of the outcome process. In order to give a theoretical justification for the use of linear contracts, as in Holmstrom and Milgrom (1987), we consider a variant of its generalization given by Sung (1995), into which collusion and renegotiation possibilities among agents are incorporated. In this model, we prove that there exists a linear and stationary optimal compensation scheme which is also immune to collusion and renegotiation.
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