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Minimum payments and induced effort in moral hazard problems |
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| Affiliation: | 1. College of Management and Economics, Tianjin University, Tianjin 30072, China;2. Key Laboratory of Electronic Commerce and Logistics of Chongqing, Chongqing University of Posts and Telecommunications, Chongqing 400065, China;1. Am Stadtpark 2A, Görlitz, Germany;2. Integrity Testing Laboratory Inc., Markham, Ontario, Canada;3. GfE Fremat GmbH, Freiberg, Germany;4. Department of Chemistry, University of Toronto, Toronto, Ontario, Canada;5. Department of Chemical Engineering and Applied Chemistry, University of Toronto, Toronto, Ontario, Canada |
| 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 agentʼs 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. |
| Keywords: | Minimum payments Moral hazard Induced effort Productivity Incentives |
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