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Ex-post moral hazard and manipulation-proof contracts

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  • Jean-Gabriel Lauzier

Abstract

We examine the trade-off between the provision of incentives to exert costly effort (ex-ante moral hazard) and the incentives needed to prevent the agent from manipulating the profit observed by the principal (ex-post moral hazard). Formally, we build a model of two-stage hidden actions where the agent can both influence the expected revenue of a business and manipulate its observed profit. We show that manipulation-proofness is sensitive to the interaction between the manipulation technology and the probability distribution of the stochastic output. The optimal contract is manipulation-proof whenever the manipulation technology is linear. However, a convex manipulation technology sometimes leads to contracts with manipulations in equilibrium. Whenever the distribution satisfies the monotone likelihood ratio property, we can always find a manipulation technology for which the optimal contract is not manipulation-proof.

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  • Jean-Gabriel Lauzier, 2021. "Ex-post moral hazard and manipulation-proof contracts," Papers 2112.06811, arXiv.org.
    • Handle: RePEc:arx:papers:2112.06811
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    References listed on IDEAS

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    1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    2. Jean-Gabriel Lauzier, 2021. "Envelope theorem and discontinuous optimisation: the case of positioning choice problems," Papers 2112.06815, arXiv.org.
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    1. Jean-Gabriel Lauzier, 2021. "Envelope theorem and discontinuous optimisation: the case of positioning choice problems," Papers 2112.06815, arXiv.org.

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