ON COUNTERVAILING INCENTIVES

This paper extends and unifies previous work on optimal contracts under countervailing incentives, shedding light in particular on the relation between countervailing incentives and pooling (''inflexible rules''). Our main result is that the nature of the optimal contract depends crucially on whether the agent's utility is quasiconcave or quasiconvex in the private parameter: the optimal contract is separating in the former case and it may entail pooling in the latter case. Journal of Economic Literature Classification Number: D82. (C) 1995 Academic Press, Inc.