Optimal retail lease contracts: the principal-agent approach

Abstract

This paper considers retail lease contracts that are common in practice in a principal-agent framework. The key question concerns whether the optimal linear lease contract should have both the fixed rent and the percentage rent linear in sales. The analysis shows that an optimal linear risk-sharing contract is a form of the pure percentage rent if the tenant is risk averse and the landlord is risk neutral. However, an optimal linear contract that provides incentives for effort and shares risk may include the percentage rent and the fixed rent as well.