Abstract
In this paper we examine under a variety of contractual and informational settings how the addition of an additional agent affects the moral hazard problem between a principal and an agent. We find that there are circumstances when, even though the second agent can provide perfect information about the actions of the first agent, and vice versa, there is still a possibility that a wealth transfer from the principal to agents will occur. We later show that through an appropriate bonus-penalty scheme that a prisoner's dilemma situation can be created that eliminates any possibility of a wealth transfer. This paper differs from other recent works in this area in that it explicitly allows for collusive behavior and does not require that the principal know the explicit form of the agents' utility functions.
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