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Moral Hazard

  • Francesco Squintani

When a principal and an agent operate with simple contracts, at equilibrium, renegotiation will occur after the action is taken. Also, since renegotiation makes incentive contracts non-credible, the principal may prefer non-renegotiable monitoring options. Current literature does not fully reconcile these predictions with the observation of simple non-renegotiated incentive contracts. We model a principal-agent interaction in a social learning framework, and assume that when renegotiation is not observed, players may forget its feasibility, with infinitesimal probability. The unique stable state of our model predicts that the second-best simple incentive contracts occur with non-negligible positive frequency.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1269.

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Date of creation: Jul 1999
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Handle: RePEc:nwu:cmsems:1269
Contact details of provider: Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
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Web page: http://www.kellogg.northwestern.edu/research/math/
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  1. Benjamin E. Hermalin and Michael L. Katz., 1990. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency," Economics Working Papers 90-141, University of California at Berkeley.
  2. Jorgen W. Weibull, 1997. "Evolutionary Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262731215, June.
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  7. Alos-Ferrer, C., 1998. "Dynamic Systems with a Continuum of Randomly Matched Agents," Papers 9801, Washington St. Louis - School of Business and Political Economy.
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  12. Harsanyi, John C, 1995. "Games with Incomplete Information," American Economic Review, American Economic Association, vol. 85(3), pages 291-303, June.
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