Inflexible Rules in Incentive Problems
Abstract
In practice, contracts involve "standard terms" or "rules," allowing for variations
only under "exceptional" circumstances. We develop a simple model in which optimal
contracts display this feature, even in the absence of transactions costs. Rules arise
when an agent has "countervailing incentives" to misrepresent private information.
These incentives are created by endowing the agent with a critical factor of production
ex ante. Applications in regulatory, labor, and legal settings are developed.
Type
Journal articleSubject
contractsPermalink
https://hdl.handle.net/10161/2103Collections
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Tracy R. Lewis
Walter M. Upchurch, Jr. Distinguished Professor of Business Administration
Tracy Lewis is Professor of Economics at the Fuqua School of Business at Duke University,
where he holds the Black Chair in Economics. Professor Lewis founded the Innovation
Center at the University. Prior to joining the Duke University Faculty in 2003, he
served on the faculties at the University of Florida, at the California Institute
of Technology, the University of British Columbia, and the University of California,
Davis. Aside from academic employment, he has also held positions at the Fed
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