Participation in moral hazard problems

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Abstract

Two principals engage in Hotelling competition for an agent's services under incomplete information as to her outside option (location). This renders the agent's participation decision probabilistic from the perspective of each principal. Regardless of the market structure at equilibrium the optimal contract features a trade-off between participation probability and incentives. Rent and effort are inversely related and non-monotonic in the agent's transport cost and so in market structures; they increase (decrease) with competition. Uncertainty as to the agent's location may increase or decrease the rent compared to full information. This correspondingly harms or benefits principals.

Original languageEnglish
Pages (from-to)10-24
Number of pages15
JournalGames and Economic Behavior
Volume95
DOIs
Publication statusPublished - Jan 2016
Externally publishedYes

Keywords

  • Asymmetric information
  • Contract
  • Moral hazard
  • Participation constraint
  • Principal-agent

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