Optimal Organization of Surrogacy Contracts and Underinvestment

Abstract

Abstract:We develop a model of commercial gestational surrogacy in which a childless couple approaches a prospective surrogate, who is willing to gestate for the couple. The surrogate's care is noncontractible. We show that if the surrogate doesn't have any wealth, at the optimum, she is always found to put in sub-optimal effort. Put differently, the surrogate cannot be made a residual claimant and therefore eliciting first best care is never optimal. Therefore the paper, in a hidden action framework, formalizes this 'inefficiency' inherent in the Indian 'rent-a-womb' market.