Standards and Incentives under Moral Hazard with Limited Liability

Felix Reinshagen

Discussion Papers in Economics from University of Munich, Department of Economics

Abstract: We consider a model of moral hazard with limited liability of the agent and effort that is two-dimensional. One dimension of the agent’s effort is observable and the other is not. The principal can thusmake the contract conditional not only on outcome but also on observable effort. The principal’s optimal contract gives the agent no rent and – in contrast to the first-best allocation – uses toomuch observable effort and too little unobservable effort. This distortion in the relative use of the two kinds of effort increases if the agent’s liability becomes more limited.

Keywords: moral hazard; two-dimensional effort; regulation (search for similar items in EconPapers)
JEL-codes: D82 D86 K32 (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-bec, nep-cta, nep-hrm, nep-law and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenec:12750

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