Optimal Contracting With Dynamic Multitasking

• Author / Creator

  Chen, Wenjie

• We formulate a continuous-time principal-agent model in which the agent performs two tasks: accident prevention and effort exertion. The principal can design a contract for the agent consisting of three components: a lump-sum payment, penalties when accidents occur, and continuous payments depending on the daily production outcome. A patient principal induces the agent to do more prevention and less effort as time progresses so that the principal earns
  the benefit from extra accident reduction net extra lump-sum payment. The principal punishes a risk-averse agent on the same level regardless of the actual accident size. The principal gives incentives for more effort and less prevention if the agent is highly risk averse to sudden payment decreases because this allows the principal to avoid a massive lump-sum payment needed to compensate the agent. When a risk-neutral agent is protected by an absolute threshold on the penalty per accident, as a form of partially limited liability, he/she is punished more for small accidents than he/she is without the protection. For a risk-neutral agent, a suitably chosen threshold in percentage of the accident costs has the same effect on the optimal task levels as an absolute threshold. However, such a link does not exist when the agent is risk averse.

• Subjects / Keywords

  • Effort Exertion
  • Optimal Contracting
  • Accident Prevention
  • Principal-agent Problem

• Graduation date

  Fall 2015

• Type of Item

  Thesis

• Degree

  Master of Science

• DOI

  https://doi.org/10.7939/R35X25Q4W

• License

  This thesis is made available by the University of Alberta Libraries with permission of the copyright owner solely for non-commercial purposes. This thesis, or any portion thereof, may not otherwise be copied or reproduced without the written consent of the copyright owner, except to the extent permitted by Canadian copyright law.