ABSTRACT
Contracts are important because any exchange of products and services must be coordinated by some form of contract, be it explicit or implicit (Hart 1989). There are a variety of approaches to the analysis of contracts. The most common is principal-agent theory, also known as the incentive contract paradigm. Ross (1973) was one of the first to model formally principalagent relationships. Among others, Grossman and Hart (1983), Holmstrom (1979, 1982), Harris and Raviv (1979), Calvo and Wellisz (1978), Mirrlees (1976), and Becker and Stigler (1974) also studied the principal-agent question. In this pursuit, the typical model takes the following form: the principal maximizes some objective function subject to the agent’s utility constraint (Hart and Holmstrom 1987; Sappington 1991).
