Minimum payments and induced effort in moral hazard problems

Ohad Kadan, Jeroen Swinkels*

*Corresponding author for this work

Research output: Contribution to journalArticle

5 Scopus citations

Abstract

Consider a moral hazard problem in which there is a constraint to pay the agent no less than some amount m. This paper studies the effect of changes in m on the effort that the principal chooses to induce from the agent. We present sufficient conditions on the informativeness of the signal observed by the principal and on the agent's utility under which when m increases, induced effort (and hence productivity) falls. We also study how the cost minimizing contract for any given effort level varies in m. We present an efficient algorithm for numerically calculating optimal contracts for given parameters and show that induced effort falls when m is increased in many cases even when our sufficient conditions fail.

Original languageEnglish (US)
Pages (from-to)468-489
Number of pages22
JournalGames and Economic Behavior
Volume82
DOIs
StatePublished - Nov 1 2013

Keywords

  • D86
  • Incentives
  • Induced effort
  • Minimum payments
  • Moral hazard
  • Productivity

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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