How Social Preferences Mitigate Moral Hazard in Situations of Financial Support

31 Pages Posted: 23 Oct 2018

See all articles by Christian Knoller

Christian Knoller

Ludwig-Maximilians-Universität Munich

Stefan Neuß

Ludwig Maximilian University of Munich (LMU)

Richard Peter

University of Iowa

Date Written: September 29, 2018

Abstract

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

Knoller, Christian and Neuß, Stefan and Peter, Richard, How Social Preferences Mitigate Moral Hazard in Situations of Financial Support (September 29, 2018). Available at SSRN: https://ssrn.com/abstract=3257434 or http://dx.doi.org/10.2139/ssrn.3257434

Christian Knoller

Ludwig-Maximilians-Universität Munich ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Stefan Neuß

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Richard Peter (Contact Author)

University of Iowa ( email )

341 Schaeffer Hall
Iowa City, IA 52242-1097
United States

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