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This article gives a new explanation for the phenomenon of subcontracting. A model in which a principal contracts two agents who work in a sequence on a project, have soft information and can collude is considered. Side-contracts between agents can be signed at any stage of the game. It is shown that in this setting both a decentralized contracting structure, in which contracting of the agents at...
While the existing literature assumes either agents to be risk neutral or information about the outcome to be perfect, in this paper we allow for risk averse agents and find an optimal contract scheme which is robust to errors on the distribution of outcome. The optimal payment contract is derived and the comparative statics of the optimal payment scheme are analyzed. As the main insight it is shown...
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