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Principal-Agent Contracts under the Threat of Insurance

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Author Info
Mariano Tommasi
Federico Weinschelbaum

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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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Publisher 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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Related research
Keywords:

Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Joon Song, 2008. "Perks: Contractual Arrangements to Restrain Moral Hazard," Economics Discussion Papers 650, University of Essex, Department of Economics. [Downloadable!]
  2. Joon Song, 2007. "Futures Market: Contractual Arrangement to Restrain Moral Hazard in Teams," Economics Discussion Papers 633, University of Essex, Department of Economics. [Downloadable!]
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