Delegated Contest with Two Compensation Contracts: Pure-contingent Fees and Hybrid Fees

This paper explores: (i) how we often observe clients’ delegates work on hybrid-fee contracts; and (ii) how the hybrid-fee contracts incur excessive effort levels of delegates than other contracts such as pure-contingent-fee contracts. To do so, we consider a rent-seeking contest with delegation. Each client chooses a contract between a pure-contingent-fee contract and a hybrid-fee contract. We find that when both players choose the pure-contingent-fee contracts, the contracts lead to increase their expected payoffs. But a prisoner’s dilemma exists in the contest: at the subgame-perfect equilibrium, the equilibrium contracts are hybrid-fee contracts for both players, which leads to lower the expected payoffs for them, and which incurs excessive effort levels in the contest.