DOUBLE-SIDED MORAL HAZARD AND THE NATURE OF SHARE CONTRACTS

Contractual arrangements involving revenue/profit sharing are often ba sed on fairly simple, often linear, rules. In addition, in many contex ts these contracts are not finely adjusted to the particular circumsta nces of individual agents or markets, nor do they vary over time to th e extent current theories based on optimal contracting suggest they sh ould, We develop a simple model of such revenue- or profit-sharing arr angements based on double-sided moral hazard and show that this model can account for many of these stylized facts. More specifically, the m odel shows that linear contracts can be optimal and that benefits from customizing terms cant in some cases, be quite limited, if not zero.