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Exogenous Targeting Instruments as a Solution to Group Moral Hazards

The ability of four contracts within the general class of exogenous targeting instruments, proposed by Segerson (1988), to induce socially optimal outcomes in a group moral hazard environment is investigated in an experiment based on Nalbantian and Schotter (1987). Both contracts based on the Holmstrom (1982) forcing contract with multiple equilibria, and contracts based on the Segerson study with unique equilibria are tested. My result -- that contracts can be designed that mitigate the moral hazard problem at the aggregate level -- is a significant advance on the result of Nalbantian and Schotter -- that costly monitoring or competitive teams are required to solve the moral hazard problem. It is shown that this result is robust to uncertainty as well as experience. However, none of the contracts insures compliance at the individual level, and as a result hefty fines may be accrued by individuals even when they choose the socially optimal action.

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File URL: http://www.economics.mcmaster.ca/documents/department-working-papers/deptwp9801.pdf
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Paper provided by McMaster University in its series Department of Economics Working Papers with number 1998-01.

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Length: 48 pages
Date of creation: Jan 1998
Date of revision:
Handle: RePEc:mcm:deptwp:1998-01
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  1. Anastasios Xepapadeas, . "Observability And Choice Of Instrument Mix In The Control Of Externalities," Working Papers 9401, University of Crete, Department of Economics.
  2. James Andreoni, 1997. "Warm-glow versus cold-prickle: the effect of positive and negative framing on cooperation in experiments," Levine's Working Paper Archive 671, David K. Levine.
  3. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  4. David Andolfatto & Ed Nosal, 1997. "Optimal Team Contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 30(2), pages 385-96, May.
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  8. McKenna, C.J. & Livernois, J., 1996. "Truth or Consequences? Enforcing Pollution Standards," Working Papers 1996-7, University of Guelph, Department of Economics and Finance.
  9. Roth, Alvin E, 1988. "Laboratory Experimentation in Economics: A Methodological Overview," Economic Journal, Royal Economic Society, vol. 98(393), pages 974-1031, December.
  10. Keser, Claudia, 1996. "Voluntary contributions to a public good when partial contribution is a dominant strategy," Economics Letters, Elsevier, vol. 50(3), pages 359-366, March.
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  12. Bagnoli, Mark & McKee, Michael, 1991. "Voluntary Contribution Games: Efficient Private Provision of Public Goods," Economic Inquiry, Western Economic Association International, vol. 29(2), pages 351-66, April.
  13. Livernois, John & McKenna, C. J., 1999. "Truth or consequences: Enforcing pollution standards with self-reporting," Journal of Public Economics, Elsevier, vol. 71(3), pages 415-440, March.
  14. Sefton, Martin & Steinberg, Richard, 1996. "Reward structures in public good experiments," Journal of Public Economics, Elsevier, vol. 61(2), pages 263-287, August.
  15. Swierzbinski Joseph E., 1994. "Guilty until Proven Innocent-Regulation with Costly and Limited Enforcement," Journal of Environmental Economics and Management, Elsevier, vol. 27(2), pages 127-146, September.
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  21. repec:att:wimass:9406 is not listed on IDEAS
  22. Rapoport, Amnon & Suleiman, Ramzi, 1993. "Incremental Contribution in Step-Level Public Goods Games with Asymmetric Players," Organizational Behavior and Human Decision Processes, Elsevier, vol. 55(2), pages 171-194, July.
  23. Nalbantian, Haig R & Schotter, Andrew, 1997. "Productivity under Group Incentives: An Experimental Study," American Economic Review, American Economic Association, vol. 87(3), pages 314-41, June.
  24. Sonnemans, Joep & Schram, Arthur & Offerman, Theo, 1998. "Public good provision and public bad prevention: The effect of framing," Journal of Economic Behavior & Organization, Elsevier, vol. 34(1), pages 143-161, January.
  25. Xepapadeas, A. P., 1991. "Environmental policy under imperfect information: Incentives and moral hazard," Journal of Environmental Economics and Management, Elsevier, vol. 20(2), pages 113-126, March.
  26. McAfee, R Preston & McMillan, John, 1991. "Optimal Contracts for Teams," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 561-77, August.
  27. Segerson, Kathleen, 1988. "Uncertainty and incentives for nonpoint pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 87-98, March.
  28. Xepapadeas, A. P., 1992. "Environmental policy design and dynamic nonpoint-source pollution," Journal of Environmental Economics and Management, Elsevier, vol. 23(1), pages 22-39, July.
  29. Cadsby, Charles Bram & Maynes, Elizabeth, 1999. "Voluntary provision of threshold public goods with continuous contributions: experimental evidence," Journal of Public Economics, Elsevier, vol. 71(1), pages 53-73, January.
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