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Oxford Economic Papers Advance Access originally published online on March 22, 2007
Oxford Economic Papers 2007 59(2):253-274; doi:10.1093/oep/gpl034
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© Oxford University Press 2007 All rights reserved

Optimal share contracts with moral hazard on effort and in output reporting: managing the double Laffer curve effect

Alain de Janvry* and Elisabeth Sadoulet{dagger}

*Department of Agricultural and Resource Economics, Giannini Hall 207, University of California, Berkeley, CA 94720 USA; e-mail: alain{at}are.berkeley.edu
{dagger}Department of Agricultural and Resource Economics, University of California at Berkeley; e-mail: Sadoulet{at}are.berkeley.edu


  Abstract

We explore in this paper the design of optimal share contracts when there is a double moral hazard, one on inputs exclusively provided by the agent (such as effort) and the other in reporting the level of output to be shared with the principal, and when there is a social efficiency cost to under-reporting. The optimal contract is second best in that it allows for residual moral hazard in both effort and output reporting. The model predicts that contract terms will vary with the value to the tenant of unreported output as well as with any capacity of the principal to directly supervise the agent. The model is written for a landlord-tenant share contract but applies as well for tax collection and franchising.

Key Words: JEL classifications: D02 • D82 • L14


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