Abstract
This study focuses on the optimal incentive schemes in a multi-agent moral hazard model, where each agent has other-regarding preferences and an individual measure of output, with both being observable by the principal. In particular, the two agents display homo moralis preferences. I find that, contrary to the case with purely selfish preferences, tournaments can never be optimal when agents are risk averse, and as the degree of morality increases, positive payments are made in a larger number of output realizations. Furthermore, I extend the analysis to a dynamic setting, in which a contract is initially offered to the agents, who then repeatedly choose which level of effort to provide in each period. I show that the optimal incentive schemes in this case are similar to the ones obtained in the static setting, but for the role of intertemporal discounting.
Highlights
While most of the traditional economic literature on moral hazard has focused on agents’ heterogeneous skills [1,2] and task allocation [3,4], it is crucial to take into account social preferences in the context of incentive provision ([4] explore the notion of a mission-oriented production of collective goods, emphasizing the role of matching between the mission preferences of principals and agents, since the former economizes on the need for high-powered incentives)
The concept of Kantian ethical rules in economic interactions was first introduced by [10], while [11,12] build upon the ideas of assortativity and evolutionaty stability presented in [13] to derive a class of preferences that would be favored by evolution in settings with which individuals carrying rare mutant preferences get to interact
I consider the possibility of repeated interactions between the agents, as in [19], and show that the optimal incentive scheme in the dynamic setting largely maintains the structure of its static counterpart but for the effects of discounting in the wages paid by the principal
Summary
While most of the traditional economic literature on moral hazard has focused on agents’ heterogeneous skills [1,2] and task allocation [3,4], it is crucial to take into account social preferences in the context of incentive provision ([4] explore the notion of a mission-oriented production of collective goods, emphasizing the role of matching between the mission preferences of principals and agents, since the former economizes on the need for high-powered incentives). I study the optimal incentives schemes a principal can offer to a team of two agents characterized by a novel class of other-regarding preferences, namely homo moralis preferences. Using a multiagent moral hazard environment, as first proposed in [17,18], I show that the optimal contracts offered to the teams of agents have to balance three different aspects: the agents’ prosocial behavior, here characterized by their degree of morality, risk aversion and incentive provision (Section 2 explores in more depth the concept and the utility function representing moral preferences). In a similar vein to [20] as well, [25] derives optimal incentive schemes for reciprocal agents, a class of preferences first modeled in normal form games by [26] (a wider discussion on different classes of prosocial preferences can be found in [16]). All proofs are collected in the Appendix A
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