Pareto Improving Inefficiency
AbstractWe examine the effects of a systematic increase in the agents operating costs in a standard agency setting with moral hazard. We identify conditions under which the agent benefits from the increase in his costs. Perhaps more surprisingly, we show that the principal and he agent can both benefit from the increase in the agents costs under plausible conditions. Thus, increased inefficiency can be Pareto-improving.
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Bibliographic InfoPaper provided by University of Cincinnati, Department of Economics in its series University of Cincinnati, Economics Working Papers Series with number 2008-04.
Length: 18 pages
Date of creation: 2008
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- Debashis Pal & David Sappington & Ying Tang, 2012. "Sabotaging cost containment," Journal of Regulatory Economics, Springer, vol. 41(3), pages 293-314, June.
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