INCENTIVE CONTRACTING UNDER LIMITED-LIABILITY

We examine the nature of incentive schemes between the principal and t he risk-neutral agent in the presence of the agent's limited liability and ex ante action choice. We consider alternative schemes when a sim ple rental contract is infeasible due to the limited liability of the agent and study the effectiveness of a performance bonus scheme in ach ieving the first-best outcome. We also discuss some implications of su ch schemes in real practices.