Work Environment and Moral Hazard

Abstract

We consider a firm's provision of safety and health measures or working conditions in a hidden action agency problem. The firm's second best optimum is compared to the first best. We consider the effects of changes in the shares of damages borne by the firm and by the agent. We examine the effects of increases in the hazard level of the agent's job as well as changes in the efficiency of the firm's working conditions in providing safety. A final section examines the direct regulation of working conditions and the firm's damage share.

Keywords: Workplace Safety, Moral Hazard

JEL Classification: L2, J32, J33, M5, M12