Minimum payments and induced effort in moral hazard problems
AbstractConsider a moral hazard problem in which there is a constraint to pay the agent no less than some amount m. This paper studies the effect of changes in m on the effort that the principal chooses to induce from the agent. We present sufficient conditions on the informativeness of the signal observed by the principal and on the agentʼs utility under which when m increases, induced effort (and hence productivity) falls. We also study how the cost minimizing contract for any given effort level varies in m. We present an efficient algorithm for numerically calculating optimal contracts for given parameters and show that induced effort falls when m is increased in many cases even when our sufficient conditions fail.
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Bibliographic InfoArticle provided by Elsevier in its journal Games and Economic Behavior.
Volume (Year): 82 (2013)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/inca/622836
Minimum payments; Moral hazard; Induced effort; Productivity; Incentives;
Find related papers by JEL classification:
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
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