Titlebook: Contract Theory: Discrete- and Continuous-Time Models; Jaeyoung Sung Textbook 2023 The Editor(s) (if applicable) and The Author(s), under

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Discrete-Time Formulation Iand second-best solutions are affected by risk aversion of the two parties, and by such constraints as participation, incentive compatibility, and limited liability. We also learn that the principal expectedly pays the risk-averse agent in the second best more than she does in the first best.

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Discrete-Time Formulation II moral hazard, the optimal contract decision is a tradeoff between the benefit of improving the agent’s work incentives and the cost of sacrificing the risk-sharing efficiency, and that the optimal performance metric for the optimal contract is a combination of the outcome and relevant signals which

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