Multitasking, Multidimensional Screening, and Moral Hazard with Risk Neutral Agents

7 Pages Posted: 17 Aug 2010

See all articles by Suren Basov

Suren Basov

University of Melbourne - Department of Economics

Svetlana Danilkina

Department of Economics, University of Melbourne

Date Written: May 26, 2010

Abstract

In this paper we consider a model where a risk-neutral principal devises a contract for a risk neutral agent who can exert effort along different dimensions and possesses private information about her cost of effort. We show that when the number of effort dimensions exceeds the number of performance measures observed by the principal hidden action leads to an additional welfare loss compared with pure adverse selection even if both parties are risk neutral and the production technology is independent of the agent's type. The result implies that if effort has many dimensions it is beneficial to the principal to base employees' compensation on many performance measures rather than on a single 'bottom-line' measure (e.g. their contribution to the company's profits).

Suggested Citation

Basov, Suren and Danilkina, Svetlana, Multitasking, Multidimensional Screening, and Moral Hazard with Risk Neutral Agents (May 26, 2010). Economic Record, Vol. 86, Issue s1, pp. 80-86, September 2010, Available at SSRN: https://ssrn.com/abstract=1660036 or http://dx.doi.org/10.1111/j.1475-4932.2010.00662.x

Suren Basov (Contact Author)

University of Melbourne - Department of Economics ( email )

Australia

Svetlana Danilkina

Department of Economics, University of Melbourne ( email )

Department of Economics, Level 4 FBE, building 105
The University of Melbourne, 111 Barry Street
Carlton, VIC 3010
Australia
+61 3 8344 6899 (Fax)

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