Quantifying the social welfare loss in moral hazard models

Mostafa Nasri, Fabian Bastin and Patrice Marcotte

European Journal of Operational Research, 2015, vol. 245, issue 1, 226-235

Abstract: The main aim of this paper is to measure the social welfare loss for a continuous moral hazard model when a set of minimal assumptions are fulfilled. By using a new approach, we are able to reproduce the results of Balmaceda, Balseiro, Correa, and Stier-Moses (2010) pertaining to the social welfare loss for discrete and continuous models respectively. Previous studies rely on the validity of the first-order approach at the expense of strong assumptions, in particular the convexity of the distribution function condition while we do not make such a restrictive assumption in our developments. In addition, we obtain new bounds for the social welfare loss that are both tight and easy to compute.

Keywords: Monotone likelihood ratio; Moral hazard model; Social welfare (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:245:y:2015:i:1:p:226-235

DOI: 10.1016/j.ejor.2015.02.024

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