Incorporating an Equipment-Care Index into the Landlord-Peasant Model: Combining a Signal and an Index to Strengthen Incentives

This paper extends the classic landlord-peasant (principal-agent) model by introducing a less manipulable index of effort. In addition to profit-based wages, the landlord randomly inspects equipment and penalizes negligence. This index-based penalty reduces the need for large wage differentials, lowering the landlord's risk while still discouraging shirking. The model shows how stable, unfakeable indicators - such as care of tools - can complement output-based incentives. Equilibrium contracts feature reduced high wages and increased low wages compared to the standard model. The results illustrate how historical and modern institutions mitigate moral hazard by combining performance signals with behavior-based indices.