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Principal-Agents Contracts Under the Threat of Insurance

Author

Listed:
  • Mariano Tommasi

    () (Department of Economics, Universidad de San Andres)

  • Federico Weinschelbaum

    () (Department of Economics, Universidad de San Andres)

Abstract

The traditional principal-agent model assumes that the principal offers an exclusive contract to the agent. This paper shows that the standard results are not robust to the introduction of additional contracting opportunities for the agent. We analyze equilibria of an extended game with the presence of additional players who might trade risk away from the agent. The contract offered by the principal in order to elicit high effort is steeper than in the standard model. In some settings, the agent accepts this contract and then unwinds part of those incentives through additional trades. (This seems consistent with some findings in the literature on managerial compensation). For some settings and parameter values, suboptimal effort is implemented in equilibrium, the principal is worse off, and total welfare is lower. These findings may call for a revision of some previous theoretical and applied conclusions. In designing compensation schemes, attention should be paid to outside opportunities, even when they are productively unrelated. Some results such as “the Informativeness Principle” might need to be reformulated to consider the observability of signals by the principal relative to their observability by other potential traders.

Suggested Citation

  • Mariano Tommasi & Federico Weinschelbaum, 2004. "Principal-Agents Contracts Under the Threat of Insurance," Working Papers 69, Universidad de San Andres, Departamento de Economia, revised Apr 2004.
  • Handle: RePEc:sad:wpaper:69
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    File URL: ftp://webacademicos.udesa.edu.ar/pub/econ/doc69.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Song, Joon, 2008. "Perks: Contractual Arrangements to Restrain Moral Hazard," Economics Discussion Papers 8921, University of Essex, Department of Economics.
    2. Aubert, Cecile, 2006. "Work incentives and household insurance: Sequential contracting with altruistic individuals and moral hazard," Economics Letters, Elsevier, vol. 92(1), pages 82-88, July.
    3. Mariano Tommasi & Federico Weinschelbaum, 2007. "Centralization vs. Decentralization: A Principal-Agent Analysis," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(2), pages 369-389, April.
    4. Joon Song, 2012. "Futures market: contractual arrangement to restrain moral hazard in teams," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(1), pages 163-189, September.
    5. Karel Janda, 2009. "Bankruptcies With Soft Budget Constraint," Manchester School, University of Manchester, vol. 77(4), pages 430-460, July.
    6. Roberto Cortes Conde, 2008. "Spanish America Colonial Patterns: The Rio de La Plata," Working Papers 96, Universidad de San Andres, Departamento de Economia, revised Mar 2008.
    7. Song, Joon, 2007. "Futures Market: Contractual Arrangement to Restrain Moral Hazard in Teams," Economics Discussion Papers 8912, University of Essex, Department of Economics.
    8. Alejandro Cid & José María Cabrera, 2012. "Joint-Liability vs. Individual Incentives in the Classroom. Lessons from a Field Experiment with Undergraduate Students," Documentos de Trabajo/Working Papers 1206, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
    9. repec:dau:papers:123456789/13655 is not listed on IDEAS

    More about this item

    Keywords

    Principal-Agent; Moral Hazard; Insurance; Common agency; Non-exclusive contracts; Managerial compensation.;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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