Optimal Wage Contracts Under Worker Moral Hazard when Workers Have Finite Lives PDF Download

Author: Jon Strand
Publisher:
ISBN:
Category : Collective bargaining
Languages : en
Pages : 22

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Author: C. N. V. Krishnan
Publisher:
ISBN:
Category :
Languages : en
Pages : 18

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In this paper, I derive the optimal wage contract when risky investment decisions are delegated by a risk-averse firm to risk-neutral agents. The firm does not know the probability distribution over the returns of any investment made by an agent. It knows only the first two moments and the bounds of return realizations of the different positive NPV investment opportunities that can be discovered by the agents. Moral hazard with respect to investments made by agents, who are protected by limited liability, is possible. I show that the optimal wage contract is simple under conditions of severe asymmetric information and moral hazard.

Author: Jaeyoung Sung
Publisher:
ISBN:
Category :
Languages : en
Pages : 51

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In spite of the importance of optimal contracting problems under moral hazard and adverse selection, current literature offers no optimal solutions to contracting problems under moral hazard and adverse selection with risk averse agents. The agent's risk aversion, however, appears to be critical for understanding managerial compensation problems. We present a continuous-time agency model with a risk-averse agent and a risk-neutral principal to show that moral hazard and adverse selection can be optimally resolved with a menu of linear contracts. In application, we discuss a few managerial compensation problems involving managerial project selection and capital budgeting decisions, and show that a flat-wage contract is sometimes optimal.

Author: William Fuchs
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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A repeated moral hazard setting in which the Principal privately observes the Agent's output is studied. It is shown that there is no loss from restricting the analysis to contracts in which the Agent is supposed to exert effort every period, receives a constant efficiency wage and no feedback until he is fired. The optimal contract for a finite horizon is characterized, and shown to require burning of resources. These are only burnt after the worst possible realization sequence and the amount is independent of both the length of the horizon and the discount factor (delta). For the infinite horizon case a family of fixed interval review contracts is characterized and shown to achieve first best as delta approaches 1. The optimal contract when delta “ 1 is partially characterized. Incentives are optimally provided with a combination of efficiency wages and the threat of termination, which will exhibit memory over the whole history of realizations. Finally, Tournaments are shown to provide an alternative solution to the problem.

Author: Jon Strand
Publisher:
ISBN:
Category : Business cycles
Languages : en
Pages : 48

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Author: Amy Finkelstein
Publisher: Columbia University Press
ISBN: 0231538685
Category : Medical
Languages : en
Pages : 161

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Addressing the challenge of covering heath care expenses—while minimizing economic risks. Moral hazard—the tendency to change behavior when the cost of that behavior will be borne by others—is a particularly tricky question when considering health care. Kenneth J. Arrow’s seminal 1963 paper on this topic (included in this volume) was one of the first to explore the implication of moral hazard for health care, and Amy Finkelstein—recognized as one of the world’s foremost experts on the topic—here examines this issue in the context of contemporary American health care policy. Drawing on research from both the original RAND Health Insurance Experiment and her own research, including a 2008 Health Insurance Experiment in Oregon, Finkelstein presents compelling evidence that health insurance does indeed affect medical spending and encourages policy solutions that acknowledge and account for this. The volume also features commentaries and insights from other renowned economists, including an introduction by Joseph P. Newhouse that provides context for the discussion, a commentary from Jonathan Gruber that considers provider-side moral hazard, and reflections from Joseph E. Stiglitz and Kenneth J. Arrow. “Reads like a fireside chat among a group of distinguished, articulate health economists.” —Choice

Author: Florian Englmaier
Publisher:
ISBN:
Category : Contracts
Languages : en
Pages : 0

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Author: Jeff Borland
Publisher:
ISBN: 9780868399058
Category : Labor contract
Languages : en
Pages : 51

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Author:
Publisher:
ISBN:
Category :
Languages : en
Pages :

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This article presents a continuous-time agency model in the presence of adverse selection and moral hazard with a risk-averse agent and a risk-neutral principal. Under the model setup, we show that the optimal controls are constant over time, and thus the optimal menu consists of contracts that are linear in the final outcome. We also show that when a moral hazard problem adds to an adverse selection problem, the monotonicity condition well known in the pure adverse selection literature needs to be modified to ensure the incentive compatibility for information revelation. The model is applied to a few managerial compensation problems involving managerial project selection and capital budgeting decisions. We argue that in the third-best world, the relationship between the volatility of the outcome and the sensitivity of the contract depends on interactions between the managerial cost and the firm`s production functions. Contrary to conventional wisdom, sometimes the higher the volatility, the higher the sensitivity of the contract. The firm receiving good news sometimes chooses safer projects or invests less than it does with bad news. We also examine the effects of the observability of the volatility on corporate investment decisions.

Author: Karl Ove Moene
Publisher:
ISBN:
Category : Land reform
Languages : en
Pages : 50

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