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Moral hazard and subjective evaluation

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  • Ishiguro, Shingo
  • Yasuda, Yosuke

Abstract

This study investigates optimal contracts to solve the moral hazard problem with subjective evaluation in a static environment with multiple agents wherein the principal observes agents' performances privately. Despite the limitations of feasible contracts that the principal can credibly offer, we show the irrelevance theorem that even under subjective evaluation, the principal can be as well off as if agents' performances are objective and verifiable, provided there are at least two risk-neutral agents whose actions satisfy a certain condition on their output distributions. Our irrelevance result encompasses a large class of moral hazard problems, including statistically correlated and technologically interdependent performance signals. We also extend the model to include multidimensional actions, limited liability constraints, and collusion among agents.

Suggested Citation

  • Ishiguro, Shingo & Yasuda, Yosuke, 2023. "Moral hazard and subjective evaluation," Journal of Economic Theory, Elsevier, vol. 209(C).
    • Handle: RePEc:eee:jetheo:v:209:y:2023:i:c:s0022053123000157
    DOI: 10.1016/j.jet.2023.105619
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    References listed on IDEAS

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    Cited by:

    1. Masanori Hatada, 2023. "Monitoring and Collusion in Subjective Evaluations," KIER Working Papers 1099, Kyoto University, Institute of Economic Research.

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    More about this item

    Keywords

    Moral hazard; Multiple agents; Subjective evaluation;
    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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