Double Moral Hazard, Monitoring, and the Nature of Contracts

Pradeep Agrawal
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Pradeep Agrawal: RBI Chair Unit, Institute of Economic Growth, University Enclave, Delhi 110 007, India (e-mail: pradeep@ieg.ernet.in.)

Journal of Economics, 2002, vol. 75, issue 1, 33-61

Abstract: generalized double-sided moral-hazard model, with risk-averse parties who mutually monitor each other (to get a reasonable idea of outcome/effort). The model considers trade-off between monitoring costs and moral hazard costs, which are endogenously determined by the extent of monitoring. Using this model, we formally prove a generalized version of Coase's conjecture – that the optimal contract minimizes the agency and risk costs. We then show how varying assumptions about the feasibility or cost of monitoring of the outcome or the worker's effort lead to different contracts being optimal. The analysis is then used to explain the nature of contracts observed in practice under many different situations. We will give an explanation as to why industrial workers typically work under wage contracts, while share contracts are common in agriculture and will explain why profit sharing is more common for senior managers than for the production workers.

Keywords: Keywords: contracts; double moral hazard; incentives; monitoring; transaction costs; risk-premium.; JEL classification: D23; D82; L14; L20. (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:75:y:2002:i:1:d:10.1007_s007120200002

DOI: 10.1007/s007120200002

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