Loopholes : Social Learning and the Evolution of Contract Form ∗

@inproceedings{Jehiel2010LoopholesS,
  title={Loopholes : Social Learning and the Evolution of Contract Form ∗},
  author={Philippe Jehiel and Andrew F. Newman},
  year={2010}
}
We explore a simple model of the evolution via “loopholes” of incentive systems such as contracts, organizations, or regulatory regimes. Young principals, who are uncertain about what actions will be feasible for their agents, get limited observations of earlier agents’ behavior, and rationally update their beliefs about feasible actions. When old, they offer contracts that deter only the harmful actions they deem sufficiently likely to exist; their agents then cheat if it is both feasible and… CONTINUE READING

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