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Participation in moral hazard problems

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  • Roger, Guillaume

Abstract

Two principals engage in Hotelling competition for an agent's services under incomplete information as to her outside option (location). This renders the agent's participation decision probabilistic from the perspective of each principal. Regardless of the market structure at equilibrium the optimal contract features a trade-off between participation probability and incentives. Rent and effort are inversely related and non-monotonic in the agent's transport cost and so in market structures; they increase (decrease) with competition. Uncertainty as to the agent's location may increase or decrease the rent compared to full information. This correspondingly harms or benefits principals.

Suggested Citation

  • Roger, Guillaume, 2016. "Participation in moral hazard problems," Games and Economic Behavior, Elsevier, vol. 95(C), pages 10-24.
    • Handle: RePEc:eee:gamebe:v:95:y:2016:i:c:p:10-24
    DOI: 10.1016/j.geb.2015.11.005
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    Cited by:

    1. Julien, Benoît & Roger, Guillaume, 2018. "Bidding for incentive contracts," Journal of Mathematical Economics, Elsevier, vol. 79(C), pages 95-105.

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    More about this item

    Keywords

    Moral hazard; Asymmetric information; Contract; Participation constraint; Principal–agent;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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