An incentive compatibility constraint is a constraint in a contract that ensures the agent
A) will be willing to take the prescribed action once the agent joins by offering incentives to do so
B) is better off taking the contract and joining the firm rather than not
C) realizes that rewards depend not only on the agent's actions, but also on the actions of the other agents in the tournament

Question

Quizplus · Accepted Answer

An incentive compatibility constraint ensures that the agent will be willing to take the prescribed action by offering incentives to do so. This is important because without such a constraint, the agent may have an incentive to act in their own self-interest rather than in the best interest of the principal. By providing incentives for the agent to take the prescribed action, the principal can ensure that the agent is motivated to act in their best interests.

An Incentive Compatibility Constraint Is a Constraint in a Contract