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Other regarding principal and moral hazard: the single agent case

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  • Banerjee, Swapnendu
  • Sarkar, Mainak

Abstract

Using the classic moral hazard problem with limited liability we characterize the optimal incentive contracts when first an other-regarding principal interacts with a self-regarding agent. The optimal contract differs considerably when the principal is ‘inequity averse’ vis-a-vis the self-regarding case. Also the agent is generally (weakly) better-off under an ‘inequity averse’ principal compared to a ‘status seeking’ principal. Then we extend our analysis and characterize the optimal contracts when both other-regarding principal and other-regarding agent interact.

Suggested Citation

  • Banerjee, Swapnendu & Sarkar, Mainak, 2014. "Other regarding principal and moral hazard: the single agent case," MPRA Paper 59654, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:59654
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    References listed on IDEAS

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    1. Englmaier, Florian & Muehlheusser, Gerd & Roider, Andreas, 2010. "Optimal Incentive Contracts under Moral Hazard When the Agent Is Free to Leave," IZA Discussion Papers 5027, Institute of Labor Economics (IZA).
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    5. Florian Englmaier, 2005. "Moral Hazard, Contracts and Social Preferences: A Survey," International Economic Association Series, in: Bina Agarwal & Alessandro Vercelli (ed.), Psychology, Rationality and Economic Behaviour, chapter 6, pages 125-139, Palgrave Macmillan.
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    Cited by:

    1. Banerjee, Swapnendu & Chakraborty, Somenath, 2023. "Optimal incentive contracts with a spiteful principal: Single agent," Mathematical Social Sciences, Elsevier, vol. 122(C), pages 29-41.
    2. Michael Krapp & Kai Sandner, 2016. "Impact of an equal pay norm on the optimal design of incentive contracts," Journal of Business Economics, Springer, vol. 86(3), pages 301-338, April.

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    More about this item

    Keywords

    Other regarding preferences; self regarding preferences; inequity-averse; status- seeking; optimal contract;
    All these keywords.

    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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