Economics at your fingertips  

The Moral Hazard of Budget-Breaking

Mukesh Eswaran () and Ashok Kotwal ()

RAND Journal of Economics, 1984, vol. 15, issue 4, 578-581

Abstract: It has recently been suggested in the agency literature that moral hazard in teams can be dealt with by introducing a third party who breaks the budget-balancing constraint, and that this facilitates the design of contracts that can sustain the Pareto optimum as a (perfect) Nash equilibrium. This note offers an explanation for why the use of budget-breaking schemes is not so widespread as that of active monitoring, despite the fact that such schemes would save the resources expended on supervision. The note demonstrates that allowing the budget to be broken introduces the potential for moral hazard on the part of the third party, which could render the proposed equilibrium incredible.

Date: 1984
References: Add references at CitEc
Citations: View citations in EconPapers (32) Track citations by RSS feed

Downloads: (external link) ... O%3B2-D&origin=repec full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See for details.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This journal article can be ordered from
https://editorialexp ... i-bin/rje_online.cgi

Access Statistics for this article

More articles in RAND Journal of Economics from The RAND Corporation
Bibliographic data for series maintained by ().

Page updated 2020-11-23
Handle: RePEc:rje:randje:v:15:y:1984:i:winter:p:578-581