Optimal Contracting with Wealth-Constrained Operators of Unknown Ability

Publication Year:
2005
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Repository URL:
https://opensiuc.lib.siu.edu/econ_dp/37
Author(s):
Dai, Chifeng
article description
This paper examines how a project owner optimally selects a project operator and motivates him to deliver an unobservable effort when potential operators are wealth-constrained. It shows that either a pooling or a separating contract can arise in equilibrium. In a separating contract, the more capable potential operator is either selected more often but awarded a smaller share of profit, or selected less often but awarded a larger share of profit.