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Moral Hazard: Base Models and Two Extensions

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  • Ines Macho-Stadler
  • David Pérez-Castrillo

Abstract

We analyze the optimal contract in static moral hazard situations, where the agent’s effort is not verifiable. We first present the main trade-offs of the principal-agent model. We cover the trade-off of incentives (motivation) vs. risk-sharing (efficiency), incentives vs. rents (when the agent is protected by limited liability), incentives to a task vs. incentives to another (in a multitask situation), and incentives to the agent vs. incentives to the principal (when both exert a non-verifiable effort). Then, we discuss two recent extensions: how incorporating behavioral biases in the analysis of incentives affects the predictions of the classical moral hazard model, and the insertion of the principal-agent problem in a matching market.

Suggested Citation

  • Ines Macho-Stadler & David Pérez-Castrillo, 2016. "Moral Hazard: Base Models and Two Extensions," CESifo Working Paper Series 5851, CESifo.
    • Handle: RePEc:ces:ceswps:_5851
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    Cited by:

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    3. Nicolas Quérou & Antoine Soubeyran & Raphael Soubeyran, 2020. "Contracting under unverifiable monetary costs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(4), pages 892-909, October.
    4. Izabela Jelovac & Samuel Kembou Nzale, 2020. "Regulation and altruism," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(1), pages 49-68, February.

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    More about this item

    Keywords

    moral hazard; behavioral approach; matching;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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