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Exogenous Targeting Instruments as a Solution to Group Moral Hazards

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John Spraggon

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Abstract

The ability of four contracts within the general class of exogenous targeting instruments, proposed by Segerson (1988), to induce socially optimal outcomes in a group moral hazard environment is investigated in an experiment based on Nalbantian and Schotter (1987). Both contracts based on the Holmstrom (1982) forcing contract with multiple equilibria, and contracts based on the Segerson study with unique equilibria are tested. My result -- that contracts can be designed that mitigate the moral hazard problem at the aggregate level -- is a significant advance on the result of Nalbantian and Schotter -- that costly monitoring or competitive teams are required to solve the moral hazard problem. It is shown that this result is robust to uncertainty as well as experience. However, none of the contracts insures compliance at the individual level, and as a result hefty fines may be accrued by individuals even when they choose the socially optimal action.

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Paper provided by McMaster University in its series Department of Economics Working Papers with number 1998-01.

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Length: 48 pages
Date of creation: Jan 1998
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Handle: RePEc:mcm:deptwp:1998-01

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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References listed on IDEAS
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. McAfee, R Preston & McMillan, John, 1991. "Optimal Contracts for Teams," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 561-77, August. [Downloadable!] (restricted)
  2. Malik Arun S., 1993. "Self-Reporting and the Design of Policies for Regulating Stochastic Pollution," Journal of Environmental Economics and Management, Elsevier, vol. 24(3), pages 241-257, May. [Downloadable!] (restricted)
  3. Camerer, Colin & Ho, Teck-Hua, 1997. "Experience-Weighted Attraction Learning in Games: A Unifying Approach," Working Papers 1003, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  4. Bagnoli, Mark & McKee, Michael, 1991. "Voluntary Contribution Games: Efficient Private Provision of Public Goods," Economic Inquiry, Oxford University Press, vol. 29(2), pages 351-66, April.
  5. Livernois, John & McKenna, C.J., 1996. "Truth or Consequences? Enforcing Pollution Standards," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH.
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  6. Malik, Arun S., 1990. "Markets for pollution control when firms are noncompliant," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages 97-106, March. [Downloadable!] (restricted)
  7. Segerson, Kathleen, 1988. "Uncertainty and incentives for nonpoint pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 87-98, March. [Downloadable!] (restricted)
  8. Xepapadeas, A. P., 1992. "Environmental policy design and dynamic nonpoint-source pollution," Journal of Environmental Economics and Management, Elsevier, vol. 23(1), pages 22-39, July. [Downloadable!] (restricted)
  9. David Andolfatto & Ed Nosal, 1997. "Optimal Team Contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 30(2), pages 385-96, May. [Downloadable!] (restricted)
  10. Xepapadeas, A. P., 1991. "Environmental policy under imperfect information: Incentives and moral hazard," Journal of Environmental Economics and Management, Elsevier, vol. 20(2), pages 113-126, March. [Downloadable!] (restricted)
  11. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn. [Downloadable!] (restricted)
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  1. Francois Cochard & Anthony Ziegelmeyer & Kene Boun My, 2005. "The Regulation of Nonpoint Emissions in the Laboratory: A Stress Test of the Ambient Tax Mechanism," Discussion Papers on Strategic Interaction 2005-37, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
  2. Kathleen Segerson & JunJie Wu, 2003. "Nonpoint Pollution Control: Inducing First-best Outcomes through the Use of Threats," Working papers 2003-03, University of Connecticut, Department of Economics, revised Aug 2004. [Downloadable!]
    Other versions:
  3. Francisco Alpízar & Till Requate & Albert Schram, 2004. "Collective versus Random Fining: An Experimental Study on Controlling Ambient Pollution," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 29(2), pages 231-252, October. [Downloadable!] (restricted)
  4. Francois Cochard & Anthony Ziegelmeyer & Kene Boun My, 2004. "Regulation of Nonpoint Emissions under Limited Information: A Stress Experimental Test of the Ambient Tax Mechanism," Discussion Papers on Strategic Interaction 2003-33, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
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