Moral hazard in strategic decision making

Martin Byford

International Journal of Industrial Organization, 2017, vol. 55, issue C, 114-136

Abstract: This paper develops a theory of moral hazard in which the agent takes the role of strategic decision-maker. Career concerns give rise to preferences over risk, which in turn create an incentive for the agent to manipulate the project’s risk-return tradeoff to the disadvantage of the principal. The resultant moral hazard can be ameliorated by an incentive contract. The optimal non-decreasing wage involves granting ‘in-the-money’ options. In the context of academic tenure, the optimal tenure standard requires the agent to exceed expectations, and lies within one standard deviation of the expected outcome.

Keywords: Moral hazard; Strategic decision-making; Career concerns; In-the-money stock-options; Tenure (search for similar items in EconPapers)
JEL-codes: D83 D86 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:55:y:2017:i:c:p:114-136

DOI: 10.1016/j.ijindorg.2017.10.001

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