IDEAS home Printed from https://ideas.repec.org/p/nwu/cmsems/1269.html
   My bibliography  Save this paper

Moral Hazard

Author

Listed:
  • Francesco Squintani

Abstract

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.

Suggested Citation

  • Francesco Squintani, 1999. "Moral Hazard," Discussion Papers 1269, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1269
    as

    Download full text from publisher

    File URL: http://www.kellogg.northwestern.edu/research/math/papers/1269.pdf
    File Function: main text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Fudenberg, Drew & Levine, David, 1998. "Learning in games," European Economic Review, Elsevier, vol. 42(3-5), pages 631-639, May.
    2. Hermalin, Benjamin E & Katz, Michael L, 1991. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency," Econometrica, Econometric Society, vol. 59(6), pages 1735-1753, November.
    3. Kim C. Border & Joel Sobel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(4), pages 525-540.
    4. Harsanyi, John C, 1995. "Games with Incomplete Information," American Economic Review, American Economic Association, vol. 85(3), pages 291-303, June.
    5. Alos-Ferrer, Carlos, 1999. "Dynamical Systems with a Continuum of Randomly Matched Agents," Journal of Economic Theory, Elsevier, vol. 86(2), pages 245-267, June.
    6. Jorgen W. Weibull, 1997. "Evolutionary Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262731215, December.
    7. Saez-Marti, Maria & Weibull, Jorgen W., 1999. "Clever Agents in Young's Evolutionary Bargaining Model," Journal of Economic Theory, Elsevier, vol. 86(2), pages 268-279, June.
    8. James A. Mirrlees, 1976. "The Optimal Structure of Incentives and Authority Within an Organization," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 105-131, Spring.
    9. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
    10. Drew Fudenberg & David K. Levine, 1998. "The Theory of Learning in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061945, December.
    11. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
    12. Schlag, Karl H., 1998. "Why Imitate, and If So, How?, : A Boundedly Rational Approach to Multi-armed Bandits," Journal of Economic Theory, Elsevier, vol. 78(1), pages 130-156, January.
    13. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    14. Matthews, Steven A, 1995. "Renegotiation of Sales Contracts," Econometrica, Econometric Society, vol. 63(3), pages 567-589, May.
    15. Michihiro Kandori, 1992. "Social Norms and Community Enforcement," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(1), pages 63-80.
    16. Nachbar, J H, 1990. ""Evolutionary" Selection Dynamics in Games: Convergence and Limit Properties," International Journal of Game Theory, Springer;Game Theory Society, vol. 19(1), pages 59-89.
    17. Boylan, Richard T., 1992. "Laws of large numbers for dynamical systems with randomly matched individuals," Journal of Economic Theory, Elsevier, vol. 57(2), pages 473-504, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Schreyögg, Jonas, 2002. "Medical Savings Accounts als Instrument zur Reduktion von moral hazard Verlusten bei der Absicherung des Krankheitsrisikos," Discussion Papers 2002/5, Technische Universität Berlin, School of Economics and Management.
    2. Rehn, Eric, 2007. "Public Hospitals - Incentives and Organization," Working Papers 2007:13, Lund University, Department of Economics, revised 01 Apr 2008.
    3. Jonathan Gruber, 2008. "Covering the Uninsured in the U.S," NBER Working Papers 13758, National Bureau of Economic Research, Inc.
    4. Crown William H. & Berndt Ernst R. & Baser Onur & Finkelstein Stan N. & Witt Whitney P. & Maguire Jonathan & Haver Kenan E., 2004. "Benefit Plan Design and Prescription Drug Utilization Among Asthmatics: Do Patient Copayments Matter?," Forum for Health Economics & Policy, De Gruyter, vol. 7(1), pages 1-35, January.
    5. Sherry Glied & Kathrine Jack, 2003. "Macroeconomic Conditions, Health Care Costs, and the Distribution of Health Insurance," NBER Working Papers 10029, National Bureau of Economic Research, Inc.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Squintani, Francesco, 2003. "Moral hazard, renegotiation, and forgetfulness," Games and Economic Behavior, Elsevier, vol. 44(1), pages 98-113, July.
    2. Francesco Squintani, 1999. "Games with Small Forgetfulness," Discussion Papers 1273, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Waters, George A., 2009. "Chaos in the cobweb model with a new learning dynamic," Journal of Economic Dynamics and Control, Elsevier, vol. 33(6), pages 1201-1216, June.
    4. Sandholm,W.H., 2003. "Excess payoff dynamics, potential dynamics, and stable games," Working papers 5, Wisconsin Madison - Social Systems.
    5. Russell Golman, 2011. "Why learning doesn’t add up: equilibrium selection with a composition of learning rules," International Journal of Game Theory, Springer;Game Theory Society, vol. 40(4), pages 719-733, November.
    6. Levine, David K. & Pesendorfer, Wolfgang, 2007. "The evolution of cooperation through imitation," Games and Economic Behavior, Elsevier, vol. 58(2), pages 293-315, February.
    7. Weibull, Jörgen W., 1997. "What have we learned from Evolutionary Game Theory so far?," Working Paper Series 487, Research Institute of Industrial Economics, revised 26 Oct 1998.
    8. Michel BenaÔm & J–rgen W. Weibull, 2003. "Deterministic Approximation of Stochastic Evolution in Games," Econometrica, Econometric Society, vol. 71(3), pages 873-903, May.
    9. Demichelis, Stefano & Ritzberger, Klaus, 2003. "From evolutionary to strategic stability," Journal of Economic Theory, Elsevier, vol. 113(1), pages 51-75, November.
    10. Mari Rege, 2000. "Networking Strategy: Cooperate Today in Order to Meet a Cooperator Tomorrow," Discussion Papers 282, Statistics Norway, Research Department.
    11. Griffin, Christopher & Mummah, Riley & deForest, Russ, 2021. "A finite population destroys a traveling wave in spatial replicator dynamics," Chaos, Solitons & Fractals, Elsevier, vol. 146(C).
    12. Ulrich Berger, 2003. "A general model of best response adaptation," Game Theory and Information 0303008, University Library of Munich, Germany.
    13. Mathias Dewatripont & Patrick Legros & Steven A. Matthews, 2003. "Moral Hazard and Capital Structure Dynamics," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 890-930, June.
    14. Balkenborg, Dieter & Schlag, Karl H., 2007. "On the evolutionary selection of sets of Nash equilibria," Journal of Economic Theory, Elsevier, vol. 133(1), pages 295-315, March.
    15. Steven Matthews, 2002. "Moral Hazard and Capital Structure Dynamics (joint with Mathias Dewatripont and Patrick Legros) Note the special time," Theory workshop papers 357966000000000095, UCLA Department of Economics.
    16. Matthews, Steven A., 2001. "Renegotiating Moral Hazard Contracts under Limited Liability and Monotonicity," Journal of Economic Theory, Elsevier, vol. 97(1), pages 1-29, March.
    17. Golman, Russell, 2012. "Homogeneity bias in models of discrete choice with bounded rationality," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 1-11.
    18. Schipper, Burkhard C., 2009. "Imitators and optimizers in Cournot oligopoly," Journal of Economic Dynamics and Control, Elsevier, vol. 33(12), pages 1981-1990, December.
    19. Sandholm,W.H., 2002. "Potential dynamics and stable games," Working papers 21, Wisconsin Madison - Social Systems.
    20. Reinoud Joosten, 2009. "Paul Samuelson's critique and equilibrium concepts in evolutionary game theory," Papers on Economics and Evolution 2009-16, Philipps University Marburg, Department of Geography.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nwu:cmsems:1269. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Fran Walker (email available below). General contact details of provider: https://edirc.repec.org/data/cmnwuus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.