A Numerical Approach to the Contract Theory: the Case of Moral Hazard

Hideo Hashimoto, Kojun Hamada and Nobuhiro Hosoe
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Hideo Hashimoto: Osaka University

No 12-03, GRIPS Discussion Papers from National Graduate Institute for Policy Studies

Abstract: We develop a few numerical models to examine the moral hazard problems exemplified by Itoh (2003, Ch. 4), following our earlier study (Hashimoto et al. (2011)) on the adverse selection problems. To this end, we first model a risk averse or risk neutral entrepreneur who selects his action among two options (e.g., low efforts and high efforts). The results of the models, whose computer programs are explained in detail for novice modelers, numerically illustrate the essence of the contract theory analysis. Second, the similar models, applied to the case with three effort level options, are built with and without the assumptions often employed to simplify the theoretical analysis. Through these exercises the significance of such assumptions in the contract theory analysis would be understood clearly.

Pages: 40 pages
Date: 2012-06
New Economics Papers: this item is included in nep-cmp and nep-cta
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