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Moral Hazard From Costless Hidden Actions

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  • Martin Byford

    (School of Economics, La Trobe University)

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    Abstract

    Principal-agent models typically rely on the assumption that the agents action has a positive and increasing marginal cost in order to explain the emergence of a moral hazard. This paper develops a model in which an agent can manipulate a projects type, and in particular the projects risk, through a costless hidden action. It is shown that even though the action is costless, the agents career concerns may give rise to preferences over the type space that deviate from those of the principal. With the agents action hidden, these preferences create a moral hazard.

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    File URL: http://www.latrobe.edu.au/__data/assets/pdf_file/0010/130888/2003.03.pdf
    File Function: First version, 2003.03.pdf
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    Bibliographic Info

    Paper provided by School of Economics, La Trobe University in its series Working Papers with number 2003.03.

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    Length: 33 pages
    Date of creation: 2003
    Date of revision:
    Handle: RePEc:trb:wpaper:2003.03

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    Web page: http://www.latrobe.edu.au/economics
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    1. Milton Harris & Bengt Holmstrom, 1981. "A Theory of Wage Dynamics," Discussion Papers 488, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
    3. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November.
    4. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
    5. Robert Gibbons & Michael Waldman, 1999. "A Theory Of Wage And Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1321-1358, November.
    6. Henry S. Farber & Robert Gibbons, 1994. "Learning and Wage Dynamics," Working Papers 707, Princeton University, Department of Economics, Industrial Relations Section..
    7. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
    8. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 921-55, November.
    9. Mathias Dewatripont & Ian Jewitt & Jean Tirole, 1999. "The economics of career concerns: part 1 :comparing information structures," ULB Institutional Repository 2013/9617, ULB -- Universite Libre de Bruxelles.
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