The moral hazard problem with high stakes

Hector Chade, Jeroen Swinkels

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

We study the moral-hazard problem when the agent's reservation utility is large, but so is the agent's value to the principal. We show that the principal's cost of implementing effort has a very simple limiting form. For large enough outside option, the principal's cost is convex in the action, so the optimally-implemented action is unique, and optimal effort rises with the agent's ability, and falls with the agent's wealth and outside option. In a competitive market setting where heterogenous principals and agents match, positive sorting ensues and effort increases in match quality, despite conflicting forces.

Original languageEnglish (US)
Article number105032
JournalJournal of Economic Theory
Volume187
DOIs
StatePublished - May 2020

Keywords

  • Comparative statics
  • First-order approach
  • Matching
  • Moral hazard
  • Principal-agent problem

ASJC Scopus subject areas

  • Economics and Econometrics

Fingerprint Dive into the research topics of 'The moral hazard problem with high stakes'. Together they form a unique fingerprint.

Cite this