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Moral Hazard and the Internal Organization of Joint Research

Simona Fabrizi () and Steffen Lippert ()

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004We address the question of how the internal organization of partnerships can be affected by moral hazard behavior of their division(s)/agent(s). We explore cases where two entregreneurs, each employing one agent subject ot moral hazard, decide how to conduct a research project together. The project's success probability is affected by agent(s)' effort(s). A joint entity can take two configurations: either both, or only one agent is kept. If two agents are kept, all degrees of substitutability between agents' efforts are considered. We show that the privately optimal internal organization of the joint entity is also socially optimal, except when agents' efforts just start to duplicate each other. In this range, due to moral hazard, too few parterships keeping both agents occur as compared to what would be socially optimal. A restriction on the number of agents to be kept in a partnership would induce too few of them leading to socially worse outcomes.

Keywords: internal organization of partnerships; moral hazard; efforts' interactions; cost functions (search for similar items in EconPapers)
JEL-codes: D21 D23 L23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic
Date: 2004-07
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