Moral Hazard with Bounded Payments, Journal of Economic Theory
We study the moral hazard problem with general upper and lower constraints M on compensation. We characterize the optimal contract and show existence and uniqueness. When minimizing costs for given effort, a principal harmed by M will pay according to M on some range of outcomes; when M reflects limited liability or a minimum wage, the contract is option-like. When the principal also chooses effort, a principal harmed by M might nonetheless never pay according to M. This cannot occur if the cost of inducing effort in the standard principal-agent problem is convex, for which we provide sufficient conditions related to the informativeness of outcome about effort.
Jeroen Swinkels, Ohad Kadan, Ian Jewitt
Swinkels, Jeroen, Ohad Kadan, and Ian Jewitt. 2008. Moral Hazard with Bounded Payments. Journal of Economic Theory. 143(1): 36-58.