Evidence of moral hazard in employee performance: an empirical analysis of contract theory

Incentive schemes in organisations are generally based on the self-interest and willingness of the employees rather than coercion. But in most of the organisations, compensation system is designed by themselves as per their interests to motivate and induce an extra effort from the agent side. But this may create certain problems in employer-employee trust which should be taken care of. The Nobel Prize winning theory in Economics named 'Contract Theory' describes about the problems and issues that arise and exist in incomplete incentive contracts and suggests the possible solutions too. This research article attempts to assess the impact of the two associated paradigms, 'moral hazard' and 'risk aversion' existing in the relationship between the principal and the agent on their employment contracts that leads to the effectiveness of the employee's performance based on their incentive schemes. The study attempts to analyse with appropriate statistical tools to assess the association and impact on the dependent and independent variables identified for the study. The results indicate the conformity of the 'Contract Theory' and contribute to its significance to assist the decision-making and implementation of the incentive system by the corporates.