Flexible Moral Hazard Problems
George Georgiadis, Doron Ravid, Balázs Szentes
Econometrica · 2024 · Volume 92 · Issue 2
Abstract
This paper considers a moral hazard problem where the agent can choose any output distribution with a support in a given compact set. The agent's effort-cost issmoothand increasing in first-order stochastic dominance. To analyze this model, we develop a generalized notion of the first-order approach applicable to optimization problems over measures. We demonstrate each output distribution can be implemented and identify those contracts that implement that distribution. These contracts are characterized by a simple first-order condition for each output that equates the agent's marginal cost of changing the implemented distribution around that output with its marginal benefit. Furthermore, the agent's wage is shown to be increasing in output. Finally, we consider the problem of a profit-maximizing principal and provide a first-order characterization of principal-optimal distributions.
Keywords
Principal-agent, moral hazard, contract theory
Enable JavaScript for citation tools and additional paper interactions.