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Pareto Improving Inefficiency

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  • Debashis Pal

    ()

  • Arup Bose
  • David Sappington

Abstract

We examine the effects of a systematic increase in the agents operating costs in a standard agency setting with moral hazard. We identify conditions under which the agent benefits from the increase in his costs. Perhaps more surprisingly, we show that the principal and he agent can both benefit from the increase in the agents costs under plausible conditions. Thus, increased inefficiency can be Pareto-improving.

Suggested Citation

  • Debashis Pal & Arup Bose & David Sappington, 2008. "Pareto Improving Inefficiency," University of Cincinnati, Economics Working Papers Series 2008-04, University of Cincinnati, Department of Economics.
  • Handle: RePEc:cin:ucecwp:2008-04
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    File URL: http://www.artsci.uc.edu/collegedepts/economics/research/docs/Wppdf/2008-04.pdf
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    Cited by:

    1. Debashis Pal & David Sappington & Ying Tang, 2012. "Sabotaging cost containment," Journal of Regulatory Economics, Springer, vol. 41(3), pages 293-314, June.

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