Pareto Improving Inefficiency
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.
|Date of creation:||2008|
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