Monitoring the Principal with Multiple Agents

Srabana Gupta and Richard Romano

RAND Journal of Economics, 1998, vol. 29, issue 2, 427-442

Abstract: Double moral hazard arises in the principal-agent model when both parties provide a nonverifiable input following contracting. Balanced-budget contracts are generally second best. If the principal's input is public to two agents, which often characterizes franchising, for example, then balanced-budget contracts exist that resolve fully double moral hazard. Agent payoffs depend on both outputs to correct principal moral hazard, rather than correlation in random effects on outputs. The equilibrium in first-best choices implemented by the contract is also unique and coalition-proof.

Date: 1998
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