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Moral Hazard and Target Budgets

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  • Shingo Ishiguro

    (Graduate School of Economics, Osaka University)

  • Yosuke Yasuda

    (Graduate School of Economics, Osaka University)

Abstract

In this paper we investigate a wide class of principal-agent problems with moral hazard and target budgets. The latter requires that the principal fixes a total budget for the wages paid to agents regardless of their outputs realized ex post. Target budgets are relevant not just because they are exogenous institutional constraints in some cases, but they can also endogenously arise in other cases, especially when agents f performances are not verifiable and thus the principal needs subjective evaluations. Although target budgets impose an additional constraint, we show the irrelevance theorem that the principal is never worse off using target budgets when there are at least two risk-neutral agents. Even when all agents are risk averse, we also show that the similar irrelevance result asymptotically holds if the number of agents is sufficiently large. Furthermore, we characterize optimal contracts when the target budget becomes a tight constraint so that the irrelevance result cannot be applied.

Suggested Citation

  • Shingo Ishiguro & Yosuke Yasuda, 2018. "Moral Hazard and Target Budgets," Discussion Papers in Economics and Business 18-03, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:1803
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    References listed on IDEAS

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    More about this item

    Keywords

    Moral Hazard; Multiple Agents; Subjective Evaluation; Target Budgets;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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