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The presence of moral hazard in budget breaking

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  • Martin Gaynor

Abstract

It is possible that a budget breaking incentive scheme may not solve the problem of moral hazard in team production, due to an incentive for a principal to cheat on such an agreement. This is a problem common to incentive schemes which result in an unbalanced budget, which include among them processes designed to reveal demand for public goods. This paper shows the conditions under which cheating is possible, and designs a payment scheme for the principal which is free of any cheating incentive. Copyright Kluwer Academic Publishers 1989

Suggested Citation

  • Martin Gaynor, 1989. "The presence of moral hazard in budget breaking," Public Choice, Springer, vol. 61(3), pages 261-267, June.
    • Handle: RePEc:kap:pubcho:v:61:y:1989:i:3:p:261-267
    DOI: 10.1007/BF00123888
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    References listed on IDEAS

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    1. Groves, Theodore & Ledyard, John O, 1977. "Optimal Allocation of Public Goods: A Solution to the "Free Rider" Problem," Econometrica, Econometric Society, vol. 45(4), pages 783-809, May.
    2. Martin L. Weitzman, 1976. "The New Soviet Incentive Model," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 251-257, Spring.
    3. Mukesh Eswaran & Ashok Kotwal, 1984. "The Moral Hazard of Budget-Breaking," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 578-581, Winter.
    4. James A. Mirrlees, 1976. "The Optimal Structure of Incentives and Authority Within an Organization," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 105-131, Spring.
    5. Edward Clarke, 1971. "Multipart pricing of public goods," Public Choice, Springer, vol. 11(1), pages 17-33, September.
    6. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    7. Tideman, T Nicolaus & Tullock, Gordon, 1976. "A New and Superior Process for Making Social Choices," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1145-1159, December.
    8. Groves, Theodore & Loeb, Martin, 1975. "Incentives and public inputs," Journal of Public Economics, Elsevier, vol. 4(3), pages 211-226, August.
    9. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-795, December.
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    Cited by:

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    2. Bos, Dieter & Peters, Wolfgang, 1995. "Double inefficiency in optimally organized firms," Journal of Public Economics, Elsevier, vol. 56(3), pages 355-375, March.
    3. Barron, John M & Gjerde, Kathy Paulson, 1997. "Peer Pressure in an Agency Relationship," Journal of Labor Economics, University of Chicago Press, vol. 15(2), pages 234-254, April.

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