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Moral Hazard: Base Models and Two Extensions

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Working paper
Author/s: 
Inés Macho-Stadler and David Pérez-Castrillo
Issue number: 
883
Series: 
Barcelona GSE Working Papes
Publisher: 
Barcelona Graduate School of Econoomics
Year: 
2016
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.
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