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Moral Hazard

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Author Info
Francesco Squintani

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Abstract

When a principal and an agent operate with simple contracts, at equilibrium, renegotiation will occur after the action is taken. Also, since renegotiation makes incentive contracts non-credible, the principal may prefer non-renegotiable monitoring options. Current literature does not fully reconcile these predictions with the observation of simple non-renegotiated incentive contracts. We model a principal-agent interaction in a social learning framework, and assume that when renegotiation is not observed, players may forget its feasibility, with infinitesimal probability. The unique stable state of our model predicts that the second-best simple incentive contracts occur with non-negligible positive frequency.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1269.

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Date of creation: Jul 1999
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Handle: RePEc:nwu:cmsems:1269

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  1. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August. [Downloadable!] (restricted)
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  2. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November. [Downloadable!] (restricted)
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  3. Kandori, Michihiro, 1992. "Social Norms and Community Enforcement," Review of Economic Studies, Blackwell Publishing, vol. 59(1), pages 63-80, January. [Downloadable!] (restricted)
  4. Harsanyi, John C, 1995. "Games with Incomplete Information," American Economic Review, American Economic Association, vol. 85(3), pages 291-303, June.
  5. Boylan, Richard T., 1990. "Laws of Large Numbers for Dynamical Systems with Randomly Matched Individuals," Working Papers 748, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  6. Dekel, Eddie & Ely, Jeffrey & Yilankaya, Okan, 2004. "Evolution of Preferences," Micro Theory Working Papers dekel-04-08-13-01-21-07, Microeconomics.ca Website, revised 09 Jun 2006. [Downloadable!]
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  7. Matthews, Steven A, 1995. "Renegotiation of Sales Contracts," Econometrica, Econometric Society, vol. 63(3), pages 567-89, May. [Downloadable!] (restricted)
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  8. Border, Kim C & Sobel, Joel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Blackwell Publishing, vol. 54(4), pages 525-40, October. [Downloadable!] (restricted)
  9. Hermalin, Benjamin E & Katz, Michael L, 1991. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency," Econometrica, Econometric Society, vol. 59(6), pages 1735-53, November. [Downloadable!] (restricted)
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  10. Nachbar, J H, 1990. ""Evolutionary" Selection Dynamics in Games: Convergence and Limit Properties," International Journal of Game Theory, Springer, vol. 19(1), pages 59-89.
  11. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January. [Downloadable!] (restricted)
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  12. Boylan, Richard T., 1992. "Laws of large numbers for dynamical systems with randomly matched individuals," Journal of Economic Theory, Elsevier, vol. 57(2), pages 473-504, August. [Downloadable!] (restricted)
  13. Saez-Marti, Maria & Weibull, Jorgen W., 1999. "Clever Agents in Young's Evolutionary Bargaining Model," Journal of Economic Theory, Elsevier, vol. 86(2), pages 268-279, June. [Downloadable!] (restricted)
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  14. James A. Mirrlees, 1976. "The Optimal Structure of Incentives and Authority Within an Organization," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 105-131, Spring. [Downloadable!] (restricted)
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