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Moral hazard and bargaining over incentive contracts

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  • Dittrich, Marcus
  • Städter, Silvio

Abstract

This paper analyses bargaining over an incentive compatible contract in a moral hazard framework. We introduce the Kalai–Smorodinsky bargaining solution and compare the outcome with the commonly applied Nash solution. Whether worker׳s effort is higher in the Nash or the Kalai–Smorodinsky solution depends on the agents׳ bargaining power. The social planner can mitigate inefficiencies arising in both bargaining solutions from the moral hazard problem and even achieve the first-best outcome by allocating the agents׳ bargaining power. If raising the worker׳s bargaining power is necessary to achieve the first-best solution, this increase must be higher in the Nash solution than in the Kalai–Smorodinsky solution.

Suggested Citation

  • Dittrich, Marcus & Städter, Silvio, 2015. "Moral hazard and bargaining over incentive contracts," Research in Economics, Elsevier, vol. 69(1), pages 75-85.
  • Handle: RePEc:eee:reecon:v:69:y:2015:i:1:p:75-85
    DOI: 10.1016/j.rie.2014.10.002
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    Cited by:

    1. Sanxi Li & Hailin Sun & Jianye Yan & Xundong Yin, 2015. "Risk aversion in the Nash bargaining problem with uncertainty," Journal of Economics, Springer, vol. 115(3), pages 257-274, July.
    2. Michela Cella & Federico Etro, 2016. "Contract competition between hierarchies, managerial compensation and imperfectly correlated shocks," Journal of Economics, Springer, vol. 118(3), pages 193-218, July.

    More about this item

    Keywords

    Incentive contracts; Moral hazard; Nash bargaining solution; Kalai–Smorodinsky solution; Bargaining power;

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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