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Moral hazard in strategic decision making

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  • Byford, Martin C.

Abstract

This paper develops a theory of moral hazard in which the agent takes the role of strategic decision-maker. Career concerns give rise to preferences over risk, which in turn create an incentive for the agent to manipulate the project’s risk-return tradeoff to the disadvantage of the principal. The resultant moral hazard can be ameliorated by an incentive contract. The optimal non-decreasing wage involves granting ‘in-the-money’ options. In the context of academic tenure, the optimal tenure standard requires the agent to exceed expectations, and lies within one standard deviation of the expected outcome.

Suggested Citation

  • Byford, Martin C., 2017. "Moral hazard in strategic decision making," International Journal of Industrial Organization, Elsevier, vol. 55(C), pages 114-136.
    • Handle: RePEc:eee:indorg:v:55:y:2017:i:c:p:114-136
    DOI: 10.1016/j.ijindorg.2017.10.001
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    References listed on IDEAS

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    More about this item

    Keywords

    Moral hazard; Strategic decision-making; Career concerns; In-the-money stock-options; Tenure;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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