Minimum payments and induced effort in moral hazard problems

Ohad Kadan and Jeroen M. Swinkels

Games and Economic Behavior, 2013, vol. 82, issue C, 468-489

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 (search for similar items in EconPapers)
JEL-codes: D86 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:82:y:2013:i:c:p:468-489

DOI: 10.1016/j.geb.2013.08.004

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