Standards and Incentives under Moral Hazard with Limited Liability
AbstractWe consider a model of moral hazard with limited liability of the agent and effort that is two-dimensional. One dimension of the agent’s effort is observable and the other is not. The principal can thusmake the contract conditional not only on outcome but also on observable effort. The principal’s optimal contract gives the agent no rent and – in contrast to the first-best allocation – uses toomuch observable effort and too little unobservable effort. This distortion in the relative use of the two kinds of effort increases if the agent’s liability becomes more limited.
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Bibliographic InfoPaper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 12750.
Date of creation: Feb 2012
Date of revision:
moral hazard; two-dimensional effort; regulation;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- K32 - Law and Economics - - Other Substantive Areas of Law - - - Environmental, Health, and Safety Law
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-20 (All new papers)
- NEP-BEC-2012-02-20 (Business Economics)
- NEP-CTA-2012-02-20 (Contract Theory & Applications)
- NEP-HRM-2012-02-20 (Human Capital & Human Resource Management)
- NEP-LAW-2012-02-20 (Law & Economics)
- NEP-MIC-2012-02-20 (Microeconomics)
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.:
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- Bhole, Bharat & Wagner, Jeffrey, 2008. "The joint use of regulation and strict liability with multidimensional care and uncertain conviction," International Review of Law and Economics, Elsevier, vol. 28(2), pages 123-132, June.
- Laux, Christian, 2001. "Limited-Liability and Incentive Contracting with Multiple Projects," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 514-26, Autumn.
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