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Moral hazard: Base models and two extensions

In: Handbook of Game Theory and Industrial Organization, Volume I

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  • Inés Macho-Stadler
  • David Pérez-Castrillo

Abstract

We analyze the optimal contract in static moral hazard situations, where the agent’s effort is not verifiable. We first present the main trade-offs of the principal–agent model. We cover the trade-off of incentives (motivation) vs risk sharing (efficiency), incentives vs rents (when the agent is protected by limited liability), incentives to a task vs incentives to another (in a multitask situation), and incentives to the agent vs incentives to the principal (when both exert a non-verifiable effort). Then, we discuss two recent extensions: how incorporating behavioral biases in the analysis of incentives and inserting the principal–agent problem in a matching market affect the predictions of the classical moral hazard model.

Suggested Citation

  • Inés Macho-Stadler & David Pérez-Castrillo, 2018. "Moral hazard: Base models and two extensions," Chapters,in: Handbook of Game Theory and Industrial Organization, Volume I, chapter 16, pages 453-485 Edward Elgar Publishing.
  • Handle: RePEc:elg:eechap:16873_16
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    Cited by:

    1. Izabela Jelovac & Samuel Kembou Nzale, 2017. "Regulation and Altruism," Working Papers halshs-01616193, HAL.

    More about this item

    Keywords

    Economics and Finance;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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