Moral Hazard and Subjective Evaluation

Abstract

This paper investigates optimal contracts to solve the moral hazard problem with subjective evaluations in the static environment in which the principal privately observes agents’ performances. Despite the limitations of feasible contracts that the principal can credibly offer, we show the irrelevance theorem that the principal is never worse off by subjective evaluations in general static environments. This irrelevance result encompasses a large class of static moral hazard problems, including multidimensional actions, production externalities, and interdependent performance signals.