A Primer on Moral-Hazard Models

31 Pages Posted: 26 Nov 2012

See all articles by Edward S. Prescott

Edward S. Prescott

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: 1999


Economists regularly consider moral hazard when they analyze topics like insurance contracts, labor compensation, and financial regulation. The primer provided here describes moral hazard, its implications, and how to model it. The modeling strategy is to allow randomization in the contractual terms, formulate the contracting problem as a linear program, and then compute solutions to examples. The technique is illustrated with a bank regulation example.

Suggested Citation

Prescott, Edward (Ned) Simpson, A Primer on Moral-Hazard Models (1999). FRB Richmond Economic Quarterly, vol. 85, no. 1, Winter 1999, pp. 47-77. Available at SSRN: https://ssrn.com/abstract=2129909

Edward (Ned) Simpson Prescott (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

P.O. Box 6387
Cleveland, OH 44101
United States

HOME PAGE: http://https://www.clevelandfed.org/people-search?pid=f8ca941e-4b51-41f6-95f8-c87f1d3806e5

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