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On the moral hazard problem without the first-order approach

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  • Kadan, Ohad
  • Swinkels, Jeroen M.

Abstract

We study the moral hazard problem without the first-order approach or other common structure. We present sufficient conditions under which the shadow value of simultaneously tightening the minimum payment and individual rationality constraints has a simple and intuitive expression. We then show how this expression can be used to perform comparative statics exercises in which we study (i) the effect of a change in the agentʼs wealth on the well-being of the principal; and (ii) the effects of the outside option and minimum payment on the effort level optimally implemented.

Suggested Citation

  • Kadan, Ohad & Swinkels, Jeroen M., 2013. "On the moral hazard problem without the first-order approach," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2313-2343.
    • Handle: RePEc:eee:jetheo:v:148:y:2013:i:6:p:2313-2343
    DOI: 10.1016/j.jet.2013.08.001
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    References listed on IDEAS

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    Cited by:

    1. Chade, Hector & Swinkels, Jeroen, 2020. "The moral hazard problem with high stakes," Journal of Economic Theory, Elsevier, vol. 187(C).
    2. Drugov, Mikhail & Ryvkin, Dmitry, 2020. "Tournament rewards and heavy tails," Journal of Economic Theory, Elsevier, vol. 190(C).
    3. Chade, Hector & Vera de Serio, Virginia N., 2014. "Wealth effects and agency costs," Games and Economic Behavior, Elsevier, vol. 86(C), pages 1-11.
    4. Keenan, Donald C. & Snow, Arthur, 2022. "Reversibly greater downside risk aversion by a prudence-based measure," Economics Letters, Elsevier, vol. 210(C).
    5. Ewerhart, Christian, 2016. "An envelope approach to tournament design," Journal of Mathematical Economics, Elsevier, vol. 63(C), pages 1-9.
    6. Wang, Wenbin & Hu, Shanshan, 2021. "Moral hazard with limited liability: Random-variable formulation and optimal contract structures," Games and Economic Behavior, Elsevier, vol. 126(C), pages 374-386.
    7. Yigal Gerchak & Eugene Khmelnitsky, 2019. "Bargaining over shares of uncertain future profits," EURO Journal on Decision Processes, Springer;EURO - The Association of European Operational Research Societies, vol. 7(1), pages 55-68, May.
    8. Kvaløy, Ola & Olsen, Trond E., 2016. "Teams in Relational Contracts," Discussion Papers 2016/23, Norwegian School of Economics, Department of Business and Management Science.
    9. Kirkegaard, René, 2017. "Moral hazard and the spanning condition without the first-order approach," Games and Economic Behavior, Elsevier, vol. 102(C), pages 373-387.
    10. Hector Chade, 2017. "Disentangling Moral Hazard and Adverse Selection," 2017 Meeting Papers 1537, Society for Economic Dynamics.
    11. Jung, Jin Yong, 2022. "Effects of changes in preferences in moral hazard problems," Journal of Economic Theory, Elsevier, vol. 205(C).

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    More about this item

    Keywords

    Principal–agent; Moral hazard; First-order approach;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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