Moral hazard and compensation packages: does reshuffling matter?

Alessandro Fedele and Luca Panaccione

Economic Theory, 2020, vol. 70, issue 1, No 6, 223-241

Abstract: Abstract We study a moral hazard model in which the agent receives a compensation package made up of multiple commodities. We allow for the possibility that commodities are traded on the market and consider two scenarios. When trade in commodities is verifiable, the agent cannot reshuffle the compensation package prescribed by the principal and simply selects the hidden action which is optimal given that package. When trade in commodities is, instead, not verifiable, the agent can reshuffle the prescribed package by trading it for another one and can select a different action. We prove that an optimal contract (i.e., a contract which maximizes the principal’s expected payoff) when trade is verifiable remains optimal when trade is not verifiable if agent’s preferences for commodities are independent of the action performed. When, instead, preference independence fails, we show it is always possible to find prices of commodities such that an optimal contract under trade verifiability cannot be optimal under nonverifiability.

Keywords: Moral hazard; Compensation packages; Reshuffling; Independent preferences (search for similar items in EconPapers)
JEL-codes: D82 D86 J33 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s00199-019-01208-5 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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: https://EconPapers.repec.org/RePEc:spr:joecth:v:70:y:2020:i:1:d:10.1007_s00199-019-01208-5

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

DOI: 10.1007/s00199-019-01208-5

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().