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Principal-Agent Contracts under the Threat of Insurance

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  • Mariano Tommasi
  • Federico Weinschelbaum

Abstract

We show that standard principal-agent results are not robust to the introduction of additional contracting opportunities for the agent. We analyze extended games including additional players who might trade risk away from the agent. For some settings and parameter values, the principal is worse off, and total welfare is lower. In some cases lower effort is implemented. The principal's contract, when high effort is implemented, is steeper than in the standard model. In some settings, the agent unwinds part of those incentives through additional trades. These findings may call for a revision of some previous theoretical and applied conclusions.

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Bibliographic Info

Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 163 (2007)
Issue (Month): 3 (September)
Pages: 379-393

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200709)163:3_379:pcutto_2.0.tx_2-l

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Citations

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Cited by:
  1. Aubert, Cecile, 2006. "Work incentives and household insurance: Sequential contracting with altruistic individuals and moral hazard," Economics Letters, Elsevier, vol. 92(1), pages 82-88, July.
  2. Roberto Cortes Conde, 2008. "Spanish America Colonial Patterns: The Rio de La Plata," Working Papers 96, Universidad de San Andres, Departamento de Economia, revised Mar 2008.
  3. Karel Janda, 2009. "Bankruptcies With Soft Budget Constraint," Manchester School, University of Manchester, vol. 77(4), pages 430-460, 07.
  4. Joon Song, 2007. "Futures Market: Contractual Arrangement to Restrain Moral Hazard in Teams," Economics Discussion Papers 633, University of Essex, Department of Economics.
  5. Joon Song, 2008. "Perks: Contractual Arrangements to Restrain Moral Hazard," Economics Discussion Papers 650, University of Essex, Department of Economics.
  6. Cid, Alejandro & Cabrera, José María, 2012. "Joint Liability vs. Individual Incentives in the Classroom. Lessons from a Field Experiment with Undergraduate Students," MPRA Paper 39907, University Library of Munich, Germany.

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