Staged-Financing Contracts with Private Information

This paper studies the use of incentive contracts in the Bolton-Scharfstein (1990) model when some agents in the population are technically constrained from falsifying reports and stealing cash. The original Bolton-Scharfstein contract may not be optimal for a large range of parametric values. The optimal contract may induce falsification and stealing in equilibrium and social welfare may be improved. Moreover, the optimal contract does not screen different types of agents. Empirical implications for various types of staged-contracts are discussed