Optimal Contract under Double-Sided Moral Hazard and Cobb-Douglas Production Technology

Abstract

This paper develops a kind of generalized double-sided moral hazard model of contract choice with Cobb-Douglas technology in a frame of principal-agent theory. Using this model, we formally prove that the optimal contract maximizes the output net of the disutility of both the parties and carry out some simulations exercise under two special cases which help explain the double-sided moral hazard issues. By focusing on production efficiency, relative importance factor and risk attitude respectively, this paper analyzes the properties of optimal contracts under three cases.