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Moral Hazard and Bargaining over Incentive Contracts

Author

Listed:
  • Marcus Dittrich
  • Silvio Städter
Abstract
This paper analyses bargaining over an incentive compatible contract in a moral hazard framework. We introduce the Kalai-Smorodinsky bargaining solution and compare the outcome with the commonly applied Nash solution. Whether worker’s effort is higher in the Nash or the Kalai-Smorodinsky solution depends on the agents. bargaining power. If agents have equal bargaining power, the contract in the Kalai-Smorodinsky solution yields a more efficient outcome and induces more effort. The social planner can mitigate inefficiencies arising in both bargaining solutions from the moral hazard problem and even achieve the first-best outcome by allocating the agents’ bargaining power. If raising the worker’s bargaining power is necessary to achieve the first-best solution, this increase must be higher in the Nash solution than in the Kalai-Smorodinsky solution.

Suggested Citation

  • Marcus Dittrich & Silvio Städter, 2014. "Moral Hazard and Bargaining over Incentive Contracts," CESifo Working Paper Series 4920, CESifo.
    • Handle: RePEc:ces:ceswps:_4920
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    References listed on IDEAS

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    Cited by:

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    3. Qi Feng & Yuanchen Li & J. George Shanthikumar, 2022. "Negotiations in Competing Supply Chains: The Kalai-Smorodinsky Bargaining Solution," Management Science, INFORMS, vol. 68(8), pages 5868-5890, August.
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    5. Giuseppe Liddo & Michele G. Giuranno, 2020. "The political economy of municipal consortia and municipal mergers," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 37(1), pages 105-135, April.

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    More about this item

    Keywords

    incentive contracts; moral hazard; Nash bargaining solution; Kalai-Smorodinsky solution; bargaining power;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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