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Work environment and moral hazard

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  • Anthony Marino

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Abstract

We consider a firm’s provision of safety and health measures (working conditions) in a hidden action agency problem in which effort and working conditions interact in multiplicatively separable (neutral) manner in the cash flow process. Under this common formulation, the firm under supplies working conditions and effort at its second best, regardless of the share of accident damages borne by the firm. At this optimum, increases in the damage share paid by the firm decrease the compensation to the agent so as to render working conditions and effort unchanged. Shifting the damage share then does not impact the firm’s or the agent’s welfare. We show that direct regulation of working conditions can improve total surplus, but that the regulation of the damage share is ineffectual. Under first order approximations, we also examine the effects of changes in the hazard level of the job and the efficiency of working conditions. Finally, we show that our results can be changed if the neutral interaction between effort and working conditions is violated. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Anthony Marino, 2015. "Work environment and moral hazard," Journal of Regulatory Economics, Springer, vol. 48(1), pages 53-73, August.
  • Handle: RePEc:kap:regeco:v:48:y:2015:i:1:p:53-73
    DOI: 10.1007/s11149-015-9278-y
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    File URL: http://hdl.handle.net/10.1007/s11149-015-9278-y
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    References listed on IDEAS

    as
    1. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    2. Anthony M. Marino & Ján Zábojník, 2008. "Work-related perks, agency problems, and optimal incentive contracts," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 565-585.
    3. Weinschenk, Philipp, 2013. "Compensation, perks, and welfare," Economics Letters, Elsevier, vol. 120(1), pages 67-70.
    4. Price V. Fishback & Shawn Everett Kantor, 1995. "Did Workers Pay for the Passage of Workers' Compensation Laws?," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 713-742.
    5. Anthony M. Marino & Ján Zábojník, 2008. "A Rent Extraction View of Employee Discounts and Benefits," Journal of Labor Economics, University of Chicago Press, vol. 26(3), pages 485-518, July.
    6. Andrea Canidio & Thomas Gall, 2012. "Rewarding Idleness," CEU Working Papers 2012_14, Department of Economics, Central European University, revised 12 Sep 2012.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Worker safety; Moral hazard; Regulation; L2; J32; J33; M5; M12;

    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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