Moral Hazard: Base Models and Two Extensions

46 Pages Posted: 5 May 2016

See all articles by Ines Macho-Stadler

Ines Macho-Stadler

Universidad Autonoma de Barcelona; CESifo (Center for Economic Studies and Ifo Institute)

David Pérez-Castrillo

Universidad Autonoma de Barcelona; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: April 13, 2016

Abstract

We analyze the optimal contract in static moral hazard situations, where the agent’s effort is not verifiable. We first present the main trade-offs of the principal-agent model. We cover the trade-off of incentives (motivation) vs. risk-sharing (efficiency), incentives vs. rents (when the agent is protected by limited liability), incentives to a task vs. incentives to another (in a multitask situation), and incentives to the agent vs. incentives to the principal (when both exert a non-verifiable effort). Then, we discuss two recent extensions: how incorporating behavioral biases in the analysis of incentives affects the predictions of the classical moral hazard model, and the insertion of the principal-agent problem in a matching market.

Keywords: moral hazard, behavioral approach, matching

JEL Classification: D860, D030, C780

Suggested Citation

Macho-Stadler, Ines and Pérez-Castrillo, David, Moral Hazard: Base Models and Two Extensions (April 13, 2016). CESifo Working Paper Series No. 5851. Available at SSRN: https://ssrn.com/abstract=2774646

Ines Macho-Stadler

Universidad Autonoma de Barcelona ( email )

Departamento de Economia e Historia Economica
08193 Barcelona
Spain

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

David Pérez-Castrillo (Contact Author)

Universidad Autonoma de Barcelona ( email )

Edifici B - Campus Bellaterra
Barcelona, 08193
Spain
(34 93) 381 1405 (Phone)
(34 93) 581 2012 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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