Abstract
This paper studies the use of incentive contracts in the Bolton–Scharfstein model when some agents in the population are technically constrained from falsifying reports and stealing cash [Bolton, P., Scharfstein, D., 1990. A theory of predation based on agency problems in financial contracting. Amer. Econ. Rev. 80, 94–106]. The original Bolton–Scharfstein contract may not be optimal for a large range of parametric values. The optimal contract may induce falsification and stealing in equilibrium and social welfare may be improved. Moreover, the optimal contract does not screen different types of agents. Empirical implications for various types of staged-contracts are discussed.
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