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Moral Hazard and Bargaining Power

Dominique Demougin () and Carsten Helm ()

German Economic Review, 2006, vol. 7, 463-470

Abstract: We introduce bargaining power in a moral hazard framework where parties are risk-neutral and the agent is financially constrained. We show that the same contract emerges if the concept of bargaining power is analyzed in either of the following three frameworks: in a standard principal-agent (P-A) framework by varying the agent's outside opportunity, in an alternating offer game, and in a generalized Nash-bargaining game. However, for sufficiently low levels of the agent's bargaining power, increasing it marginally does affect the equilibrium in the Nash-bargaining game, but not in the P-A model and in the alternating offer game. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2006.

Date: 2006
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German Economic Review is currently edited by Bernhard Felderer, Joseph F. Francois, Ivo Welch, Urs Schweizer and David E. Wildasin

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