Identification of participation constraints in contracts

In a contractual relationship, the agent forgoes outside opportunities to engage in a transaction with the principal. This paper studies the nonparametric identification of contract models with participation constraints. We employ a cost shifter as an exclusion restriction, which changes marginal cost but not the agent type distribution. First, the distribution of agent heterogeneity is identified from markets where production is highly efficient or inefficient. Second, the utility function and participation constraints are identified from agent and principal optimality conditions, respectively.