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Moral Hazard and Other‐Regarding Preferences

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  • Hideshi Itoh

Abstract

The paper aims at obtaining new theoretical insights by combining the standard moral hazard models of principal–agent relationships with theories of other‐regarding preferences, in particular inequity aversion theory. The principal is in general worse off, as the agent cares more about the wellbeing of the principal. When there are multiple symmetric agents who care about each other's wellbeing, the principal can optimally exploit their other‐regarding nature by designing an appropriate interdependent contract such as a “fair” team contract or a relative performance contract. The approach taken in this paper can shed light on issues on endogenous preferences within organizations.

Suggested Citation

  • Hideshi Itoh, 2004. "Moral Hazard and Other‐Regarding Preferences," The Japanese Economic Review, Japanese Economic Association, vol. 55(1), pages 18-45, March.
    • Handle: RePEc:bla:jecrev:v:55:y:2004:i:1:p:18-45
    DOI: 10.1111/j.1468-5876.2004.00273.x
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    References listed on IDEAS

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    1. Pedro Rey‐Biel, 2008. "Inequity Aversion and Team Incentives," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(2), pages 297-320, June.
    2. Christian Grund & Dirk Sliwka, 2005. "Envy and Compassion in Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 187-207, March.
    3. Falk, Armin & Fischbacher, Urs, 2006. "A theory of reciprocity," Games and Economic Behavior, Elsevier, vol. 54(2), pages 293-315, February.
    4. Segal, Uzi & Sobel, Joel, 2007. "Tit for tat: Foundations of preferences for reciprocity in strategic settings," Journal of Economic Theory, Elsevier, vol. 136(1), pages 197-216, September.
    5. Ernst Fehr & Alexander Klein & Klaus M. Schmidt, "undated". "Fairness, Incentives and Contractual Incompleteness," IEW - Working Papers 072, Institute for Empirical Research in Economics - University of Zurich.
    6. Florian Englmaier & Achim Wambach, 2002. "Contracts and Inequity Aversion," CESifo Working Paper Series 809, CESifo.
    7. Pfeffer, Jeffrey, 1997. "New Directions for Organization Theory: Problems and Prospects," OUP Catalogue, Oxford University Press, number 9780195114348.
    8. Abdurrahman Bekir Aydemir, 1999. "Forecast Performance of Threshold Autoregressive Models - A Monte Carlo Study," University of Western Ontario, Departmental Research Report Series 9905, University of Western Ontario, Department of Economics.
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