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Moral hazard with random participation

Organizational Economics Proceedings

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Title Moral hazard with random participation
 
Creator Roger, Guillaume
 
Description This paper studies a principal-agent problem of moral hazard, in which the outside option is stochastic. This renders the agent's participation decision random from the perspective of the principal. The participation cost is no longer defined in terms of the agent's outside option but in terms of the principal's marginal benefit of participation. The optimal contract (i) entails information rents; (ii) features a trade-off between participation probability and rents and (iii) induces a lower effort than the standard model. Random participation results in weaker incentives and in twofold (ex ante) welfare losses. Menus of contracts (screening mechanisms) are not helpful to extract information because the single-crossing condition does not hold.Keywords: moral hazard, asymmetric information, contract, participation constraint, principal-agent. JEL Classication: D82,D86.
 
Publisher The University of Sydney
 
Contributor —
 
Date 2013-01-24
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
 
Identifier https://openjournals.library.sydney.edu.au/index.php/OEW/article/view/6703
 
Source Organizational Economics Proceedings; Vol 1, No 1 (2012): 6th Annual Organizational Economics Workshop July 2012
2201-8468
 
Language eng
 
Relation https://openjournals.library.sydney.edu.au/index.php/OEW/article/view/6703/7350