Contracting with One Agent for One Period

Abstract

We introduce a general single-agent single-period incentive model that is applicable to a broad-spectrum of situations. Agent’s hidden actions contribute to the firm’s profits, which is not measurable in general. However, there are measurable outcomes, which stochastically depend on the agent’s decisions. To model the agent’s decision problem, we make a few reasonable assumptions and concentrate on continuous, differentiable and additively separable utility function. In this sense, the agent maximizes his expected net utility, considering the possible levels of the indicators along the costs associated with his actions. Our model is rather unrestricted due to a small number of assumptions, but it is not readily solvable to yield useful results. Anyway, though being simple, it provides a scientific approach for developing efficient and effective management control systems in many practical situations.