Department of Economics and Business - Universitat Pompeu Fabra

Title:: Monotone contracts
Authors:: Daniel Bird and Alexander Frug
Date:: April 2019
Abstract:: A common feature of dynamic interactions is that the environment in which they occur typically changes, perhaps stochastically, over time. We consider a general uctuating contracting environment with symmetric information, and identify a systematic eect of the uctuations in the environment on optimal contracts. We develop a notion of a separable activity that corresponds to a large class of contractual components, and provide a tight condition under which these components manifest a form of seniority: any change that occurs in these components over time, under an optimal contract, favors the agent. We illustrate how our results can be applied in various economic settings.
Keywords:: Dynamic contracting, stochastic opportunities.
JEL codes:: D86
Area of Research:: Microeconomics

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