Moral hazard: Base models and two extensions

Macho‐Stadler, Inés; Pérez‐Castrillo, David

doi:10.4337/9781785363283.00025

Cited by 10 publications

(8 citation statements)

References 104 publications

(173 reference statements)

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“…To the best of our knowledge, our findings are novel in the literature, reviewed recently by Macho-Stadler and Pérez-Castrillo (2018) and Macho-Stadler and Pérez-Castrillo (2020). 6 Positive sorting in equilibrium is predicted by Li and Ueda (2009) and Chade and Swinkels (2020).…”

Section: Introductionmentioning

confidence: 56%

Incentives, ability and disutility of effort

Martinez-Gorricho

Villalba

2021

SERIEs

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We generalize the disutility of effort function in the linear-Constant Absolute Risk Aversion (CARA) pure moral hazard model. We assume that agents are heterogeneous in ability. Each agent’s ability is observable and treated as a parameter that indexes the disutility of effort associated with the task performed. In opposition to the literature (the “traditional” scenario), we find a new, “novel” scenario, in which a high-ability agent may be offered a weaker incentive contract than a low-ability one, but works harder. We characterize the conditions for the existence of these two scenarios: formally, the “traditional” (“novel”) scenario occurs if and only if the marginal rate of substitution of the marginal disutility of effort function is increasing (decreasing) in effort when evaluated at the second-best effort. If, further, this condition holds for all parameter values and matching is endogenous, less (more) talented agents work for principals with riskier projects in equilibrium. This implies that the indirect and total effects of risk on incentives are negative under monotone assortative matching.

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Section: Introductionmentioning

confidence: 56%

Incentives, ability and disutility of effort

Martinez-Gorricho

Villalba

2021

SERIEs

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“…Thus, part of the heterogeneity in responses observed in laboratory experiments could be due to heterogeneity in the reference point. 6 As is well-known, the standard model inefficiently allocates risk as, in order to mitigate the agency problem, the principal typically requires the agent to bear some of the risk even though the agent is risk averse and the principal is assumed to be risk neutral (See for example Bolton and Dewatripont 2005;Macho-Stadler and Pérez-Castrillo 2018). Efficient allocation of risk in this case would require the principal to bear all the risk (i. e. α = 0).…”

Section: Notesmentioning

confidence: 99%

Optimal Incentives Under Gift Exchange

Khan

2019

The B.E. Journal of Theoretical Economics

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This paper studies optimal incentives in the presence of an agent’s preference for generosity, where the principal optimally chooses the level of generosity (rent) as well as the performance-based pay. We show that some minimum level of reciprocity is required for generous contracts to become attractive. More reciprocal agents exert greater effort, but they may not necessarily receive more generous offers, as our model predicts a hump-shaped relationship between generosity and the reciprocity parameter. This means that moderately reciprocal agents tend to receive a premium relative to weakly or strongly reciprocal agents. Generosity and performance-based pay are likely to behave as complements when risk-sharing motives (determined by noise in the environment and the agent’s degree of risk-aversion) are strong, and they are likely to behave as substitutes when risk-sharing motives are relatively moderate. Moreover, base-wage gifts are always optimal, whereas piece-rate or composite gifts are only optimal in a low-noise environment.

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“…In contrast to standard principal–agent models, a model with limited liability can imply that exerting effort under performance pay involves a rent for the agent. However, as emphasized by Macho‐Stadler and Perez‐Castrillo (), this requires that the agent's reservation utility is not too high . Assumption means that the reservation utility of a high‐ability agent is sufficiently low so exerting effort under (high‐powered) performance pay yields an expected utility greater than this reservation utility.…”

Section: A Model Of Performance Pay and Applicant Screeningmentioning

confidence: 99%

Performance Pay and Applicant Screening

Jirjahn

Mohrenweiser

2018

Brit J Industrial Rel

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Using German establishment data, we show that the relationship between intensity of individual-based performance pay and intensity of applicant screening depends on the nature of production. In establishments with increased multitasking, performance pay is positively associated with applicant screening. By contrast, in establishments without increased multitasking, performance pay is negatively associated with applicant screening. We do not find a similar pattern of results for group-based performance pay or profit-sharing. Our findings fit the hypothesis that individual-based performance pay induces a positive self-sorting of employees if jobs are less multifaceted. In this case, employers with a high intensity of performance pay do not need intensive applicant screening to ensure a high quality of matches between workers and jobs. However, if jobs are more multifaceted, individual-based performance pay can entail problems of adverse self-sorting. In order to mitigate or overcome these problems, employers making intensive use of performance pay also screen applicants more intensively.

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Moral hazard: Base models and two extensions

Cited by 10 publications

References 104 publications

Incentives, ability and disutility of effort

Incentives, ability and disutility of effort

Optimal Incentives Under Gift Exchange

Performance Pay and Applicant Screening

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