Moral Hazard and Bargaining over Incentive Contracts

Marcus Dittrich () and Silvio Städter

No 4920, CESifo Working Paper Series from CESifo

Abstract: This paper analyses bargaining over an incentive compatible contract in a moral hazard framework. We introduce the Kalai-Smorodinsky bargaining solution and compare the outcome with the commonly applied Nash solution. Whether worker’s effort is higher in the Nash or the Kalai-Smorodinsky solution depends on the agents. bargaining power. If agents have equal bargaining power, the contract in the Kalai-Smorodinsky solution yields a more efficient outcome and induces more effort. The social planner can mitigate inefficiencies arising in both bargaining solutions from the moral hazard problem and even achieve the first-best outcome by allocating the agents’ bargaining power. If raising the worker’s bargaining power is necessary to achieve the first-best solution, this increase must be higher in the Nash solution than in the Kalai-Smorodinsky solution.

Keywords: incentive contracts; moral hazard; Nash bargaining solution; Kalai-Smorodinsky solution; bargaining power (search for similar items in EconPapers)
JEL-codes: C71 D82 J41 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Moral hazard and bargaining over incentive contracts (2015)
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