Competition and Moral Hazard
نویسندگان
چکیده
This paper investigates the equilibrium consequences of a contractual market with moral hazard where multiple principals compete each other to offer incentive contracts to agents who choose unobservable ex post actions. We show the following limit theorems: First, when the trade–off between incentive and risk sharing causes the moral hazard problem on the side of agents, the full insurance contract, which makes the payments to agents constant across all state realizations, can be a limit equilibrium as the number of competing principals becomes sufficiently large. Thus the equilibrium contract tends to be “low-powered” in the limit. On the other hand, when agents are risk neutral but the moral hazard problem stems only from their limited wealth, the first best contract which attains maximum social welfare can be a limit equilibrium. We thus conclude that whether or not more intense competition mitigates the moral hazard problem depends on its sources. JEL Classification Numbers: D80, D82
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