Moral Hazard: Base Models and Two Extensions

Printer-friendly version
Working paper
Inés Macho-Stadler and David Pérez-Castrillo
Issue number: 
Barcelona GSE Working Papes
Barcelona Graduate School of Econoomics
We analyze the optimal contract in static moral hazard situations, where the agent’s effort is not veri…able. We fi…rst 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-veri…able effort). Then, we discuss two recent extensions: how incorporating behavioral biases in the analysis of incentives affects the predictions of the classical moral hazard model, and the insertion of the principal-agent problem in a matching market.
Developed by Paolo Gittoi