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Minimum payments and induced effort in moral hazard problems

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  • Kadan, Ohad
  • Swinkels, Jeroen M.

Abstract

Consider a moral hazard problem in which there is a constraint to pay the agent no less than some amount m. This paper studies the effect of changes in m on the effort that the principal chooses to induce from the agent. We present sufficient conditions on the informativeness of the signal observed by the principal and on the agentʼs utility under which when m increases, induced effort (and hence productivity) falls. We also study how the cost minimizing contract for any given effort level varies in m. We present an efficient algorithm for numerically calculating optimal contracts for given parameters and show that induced effort falls when m is increased in many cases even when our sufficient conditions fail.

Suggested Citation

  • Kadan, Ohad & Swinkels, Jeroen M., 2013. "Minimum payments and induced effort in moral hazard problems," Games and Economic Behavior, Elsevier, vol. 82(C), pages 468-489.
  • Handle: RePEc:eee:gamebe:v:82:y:2013:i:c:p:468-489
    DOI: 10.1016/j.geb.2013.08.004
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    References listed on IDEAS

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    Cited by:

    1. Matthias Fahn, 2017. "Minimum Wages and Relational Contracts," Journal of Law, Economics, and Organization, Oxford University Press, vol. 33(2), pages 301-331.
    2. Bo Chen & Yu Chen & David Rietzke, 2017. "Simple Contracts under Observable and Hidden Actions," Graz Economics Papers 2017-07, University of Graz, Department of Economics.

    More about this item

    Keywords

    Minimum payments; Moral hazard; Induced effort; Productivity; Incentives;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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