TY - JOUR
T1 - Moral hazard and efficiency in a frictional market
AU - Roger, Guillaume
AU - Julien, Benoît
N1 - Funding Information:
Financial support from the Australian Research Council Grant DP170104227 is gratefully acknowledged. We thank Garth Baughman, Philip Kircher, Roger Myerson, Michael Peters, Peter Norman, and Randall Wright; seminar participants at the University of Western Australia, University of Wisconsin–Madison, Deakin University, Monash University, and University of Hawaii at Manoa; and conference participants at AEA San Diego, SAET Brisbane, and AEA San Francisco
Funding Information:
* Roger: Monash University (email: [email protected]); Julien: UNSW Business School, Australia (email: [email protected]). Leeat Yariv was coeditor for this article. Financial support from the Australian Research Council Grant DP170104227 is gratefully acknowledged. We thank Garth Baughman, Philip Kircher, Roger Myerson, Michael Peters, Peter Norman, and Randall Wright; seminar participants at the University of Western Australia, University of Wisconsin–Madison, Deakin University, Monash University, and University of Hawaii at Manoa; and conference participants at AEA San Diego, SAET Brisbane, and AEA San Francisco.
Publisher Copyright:
© 2023, American Economic Journal: Microeconomics. All Rights Reserved.
PY - 2023
Y1 - 2023
N2 - Principals seek to trade with homogeneous agents by posting incentive contracts, which direct their search. Search and moral hazard interact in equilibrium. If using transfers to compensate agents failing to contract, the equilibrium allocation is always constrained-welfare-optimal in contrast to the one-to-one principal-agent problem. Search frictions thus correct that inefficiency because search requires internalizing the utility of agents. Incentives are weaker than in bilateral contracting, and agents enjoy more efficient risk sharing. With a constraint on transfers the allocation may become inefficient; principal competition results in overinsurance of the agents, too little effort in equilibrium, and excessive entry by principals.
AB - Principals seek to trade with homogeneous agents by posting incentive contracts, which direct their search. Search and moral hazard interact in equilibrium. If using transfers to compensate agents failing to contract, the equilibrium allocation is always constrained-welfare-optimal in contrast to the one-to-one principal-agent problem. Search frictions thus correct that inefficiency because search requires internalizing the utility of agents. Incentives are weaker than in bilateral contracting, and agents enjoy more efficient risk sharing. With a constraint on transfers the allocation may become inefficient; principal competition results in overinsurance of the agents, too little effort in equilibrium, and excessive entry by principals.
UR - http://www.scopus.com/inward/record.url?scp=85131508051&partnerID=8YFLogxK
U2 - 10.1257/mic.20200378
DO - 10.1257/mic.20200378
M3 - Article
AN - SCOPUS:85131508051
SN - 1945-7669
VL - 15
SP - 693
EP - 730
JO - American Economic Journal: Microeconomics
JF - American Economic Journal: Microeconomics
IS - 1
ER -