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Quantifying the social welfare loss in moral hazard models

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  • Nasri, Mostafa
  • Bastin, Fabian
  • Marcotte, Patrice

Abstract

The main aim of this paper is to measure the social welfare loss for a continuous moral hazard model when a set of minimal assumptions are fulfilled. By using a new approach, we are able to reproduce the results of Balmaceda, Balseiro, Correa, and Stier-Moses (2010) pertaining to the social welfare loss for discrete and continuous models respectively. Previous studies rely on the validity of the first-order approach at the expense of strong assumptions, in particular the convexity of the distribution function condition while we do not make such a restrictive assumption in our developments. In addition, we obtain new bounds for the social welfare loss that are both tight and easy to compute.

Suggested Citation

  • Nasri, Mostafa & Bastin, Fabian & Marcotte, Patrice, 2015. "Quantifying the social welfare loss in moral hazard models," European Journal of Operational Research, Elsevier, vol. 245(1), pages 226-235.
    • Handle: RePEc:eee:ejores:v:245:y:2015:i:1:p:226-235
    DOI: 10.1016/j.ejor.2015.02.024
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