Appendix: An optimal incentives contract can induce the revelation of true costs in a partnership by
A) imposing penalties when costs are overstated
B) offering bonus payments when costs are verified
C) renewing the reliance relationship
D) linking revealed cost to the partner's foregone expected profits
E) enlisting third-party enforcement

Question

Quizplus · Accepted Answer

Linking revealed cost to the partner's foregone expected profits is the best choice as it aligns the incentives of both partners. This means that both partners have an interest in revealing the true costs as it affects their expected profits. In this way, the contract can induce the revelation of true costs in a partnership. By imposing penalties or offering bonus payments, the focus becomes the penalties/bonuses, and partners may still have an incentive to overstate or understate costs. Renewing the reliance relationship may not address the issue of true costs, and enlisting third-party enforcement may be costly and may not always be effective.

Appendix: an Optimal Incentives Contract Can Induce the Revelation of True