A Numerical Approach to the Contract Theory: the Case of Moral Hazard
AbstractWe develop a few numerical models to examine the moral hazard problems exemplified by Itoh (2003, Ch. 4), following our earlier study (Hashimoto et al. (2011)) on the adverse selection problems. To this end, we first model a risk averse or risk neutral entrepreneur who selects his action among two options (e.g., low efforts and high efforts). The results of the models, whose computer programs are explained in detail for novice modelers, numerically illustrate the essence of the contract theory analysis. Second, the similar models, applied to the case with three effort level options, are built with and without the assumptions often employed to simplify the theoretical analysis. Through these exercises the significance of such assumptions in the contract theory analysis would be understood clearly.
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Bibliographic InfoPaper provided by National Graduate Institute for Policy Studies in its series GRIPS Discussion Papers with number 12-03.
Length: 40 pages
Date of creation: Jun 2012
Date of revision:
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-25 (All new papers)
- NEP-CMP-2012-06-25 (Computational Economics)
- NEP-CTA-2012-06-25 (Contract Theory & Applications)
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