How Social Preferences Mitigate Moral Hazard in Situations of Financial Support
31 Pages Posted: 23 Oct 2018
Date Written: September 29, 2018
When people anticipate financial support, moral hazard may occur. We conjecture that the source of financial support can mitigate moral hazard due to social preferences. We compare effort choices under purely monetary considerations and effort choices when another individual voluntarily provides financial support. In the latter case, we expect recipients of financial support to exert more effort to avoid bad outcomes (level effect) and to reduce effort provision less under more generous financial support (sensitivity effect). We find mild evidence for the level effect and strong evidence for the sensitivity effect in an incentivized laboratory experiment. This results in material efficiency gains with expected wealth being 5.5% higher and 37.3% less volatile.
Keywords: Financial Support, Moral Hazard, Social Preferences, Positive Reciprocity
JEL Classification: D81, D91, G22, H41
Suggested Citation: Suggested Citation