In this paper we evaluate certain challenges put forth by Eswaran and
Kotwal (1984) and Rasmusen (1987) concerning the legitimacy of Holmstr
om's (1982) proposed solution for the problem of moral hazard in teams
. We demonstrate that the argument put forth by Rasmusen hinges on som
e rather extreme conditions concerning the verifiability of individual
actions relating to renegotiation attempts; relaxing these conditions
renders efficient budget-balancing contracts infeasible, as argued by
Holmstrom. Second,we demonstrate that the criticism put forth by Eswa
ran and Kotwal is invalid, at least if one insists that clandestine de
als must satisfy the same incentive-compatibility conditions required
of the principal-agent contract proposed by Holmstrom.