Monotone Contracts

Abstract

A common feature of dynamic interactions is that the environment in which they occur typically changes, perhaps stochastically, over time. We consider a general fluctuating contracting environment with symmetric information, and identify a systematic effect of the fluctuations in the environment on optimal contracts. We develop a notion of a separable activity that corresponds to a large class of contractual components, and provide a tight condition under which these components manifest a form of seniority: any change that occurs in these components over time, under an optimal contract, favors the agent. We illustrate how our results can be applied in various economic settings.