Chapter 16: Moral hazard: Base models and two extensions
Inés Macho-Stadler
and
David Pérez-Castrillo
Category:
Handbook Chapter
Published:
23 Feb 2018
Page Range:
453–485
Collection:
Economics 2018
DOI:
https://doi.org/10.4337/9781785363283.00025
Restricted access

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 and inserting the principal–agent problem in a matching market affect the predictions of the classical moral hazard model.

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Cover Handbook of Game Theory and Industrial Organization, Volume I
Handbook of Game Theory and Industrial Organization, Volume I
Edited by
Luis C. Corchón
and
Marco A. Marini
Handbook
Published:
23 Feb 2018
Print ISBN:
9781785363276
eISBN:
9781785363283
DOI:
https://doi.org/10.4337/9781785363283
Pages:
576
Collection:
Economics 2018
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