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Principal-Agent Contracts under the Threat of Insurance

Author

Listed:
  • Mariano Tommasi
  • Federico Weinschelbaum

Abstract

We show that standard principal-agent results are not robust to the introduction of additional contracting opportunities for the agent. We analyze extended games including additional players who might trade risk away from the agent. For some settings and parameter values, the principal is worse off, and total welfare is lower. In some cases lower effort is implemented. The principal's contract, when high effort is implemented, is steeper than in the standard model. In some settings, the agent unwinds part of those incentives through additional trades. These findings may call for a revision of some previous theoretical and applied conclusions.

Suggested Citation

  • Mariano Tommasi & Federico Weinschelbaum, 2007. "Principal-Agent Contracts under the Threat of Insurance," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(3), pages 379-393, September.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200709)163:3_379:pcutto_2.0.tx_2-l
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    Citations

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    Cited by:

    1. Song, Joon, 2008. "Perks: Contractual Arrangements to Restrain Moral Hazard," Economics Discussion Papers 8921, University of Essex, Department of Economics.
    2. Aubert, Cecile, 2006. "Work incentives and household insurance: Sequential contracting with altruistic individuals and moral hazard," Economics Letters, Elsevier, vol. 92(1), pages 82-88, July.
    3. Mariano Tommasi & Federico Weinschelbaum, 2007. "Centralization vs. Decentralization: A Principal-Agent Analysis," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(2), pages 369-389, April.
    4. Joon Song, 2012. "Futures market: contractual arrangement to restrain moral hazard in teams," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(1), pages 163-189, September.
    5. Karel Janda, 2009. "Bankruptcies With Soft Budget Constraint," Manchester School, University of Manchester, vol. 77(4), pages 430-460, July.
    6. Roberto Cortes Conde, 2008. "Spanish America Colonial Patterns: The Rio de La Plata," Working Papers 96, Universidad de San Andres, Departamento de Economia, revised Mar 2008.
    7. Song, Joon, 2007. "Futures Market: Contractual Arrangement to Restrain Moral Hazard in Teams," Economics Discussion Papers 8912, University of Essex, Department of Economics.
    8. Alejandro Cid & José María Cabrera, 2012. "Joint-Liability vs. Individual Incentives in the Classroom. Lessons from a Field Experiment with Undergraduate Students," Documentos de Trabajo/Working Papers 1206, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
    9. repec:dau:papers:123456789/13655 is not listed on IDEAS

    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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