Moral hazard in strategic decision making |
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Affiliation: | 1. Universidad de Zaragoza, Spain;2. Centro Universitario de la Defensa, Spain |
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Abstract: | This paper develops a theory of moral hazard in which the agent takes the role of strategic decision-maker. Career concerns give rise to preferences over risk, which in turn create an incentive for the agent to manipulate the project’s risk-return tradeoff to the disadvantage of the principal. The resultant moral hazard can be ameliorated by an incentive contract. The optimal non-decreasing wage involves granting ‘in-the-money’ options. In the context of academic tenure, the optimal tenure standard requires the agent to exceed expectations, and lies within one standard deviation of the expected outcome. |
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