Hazard In Teams Research Articles

Moral hazard in teams with subjective evaluations

AbstractThis article studies moral hazard in teams where workers' wages depend on two types of performance measures: objective team output and subjective evaluations. The evaluations include both self‐ and peer evaluations. I find that when evaluations become less subjective, workers' wages should be more sensitive not only to their evaluations but also to the team's output. I also show that subjective evaluations should be used in relative terms only when the degree of subjectivity is not too high. The results also associate the introduction of a budget breaker with the level of subjectivity within organizations.

A note on cooperative hunting (Holmstrom and Fabella meet the Dumagat of Tanay)

This paper examines social institutions and norms related to cooperative big game hunting by introducing these explicitly into the basic economic model used to analyze moral hazard in teams [Holmstrom 1982]. Features built into Holmstrom’s basic model include effort to locate and acquire game, trophy taking and carcass sharing among members of a hunting party. The insights offered here are inspired by the norms of the Dumagat of Tanay in hunting, meat sharing and trophy taking. Among the Dumagat, the individual who acquires the game takes the head and the feet as trophy. The rest of the carcass is divided up along the lines described by Fabella’s [1988] natural team sharing formula. JEL classification: J23, J24

Verifiability and group formation in markets

We consider group formation in markets with asymmetric information. Our model nests standard matching problems, including one-to-one, many-to-one, and many-to-many matching, as well as matching with salaries or contracts and matching with incomplete information. Prices for group positions and private goods as well as the groups that form are determined endogenously in equilibrium, as a result of demand and supply forces. The setup includes problems as diverse as moral hazard in teams, screening on ability, and mechanism design. Our analysis, including the definition of equilibrium and existence, revolves around the randomness in matching. Our main results characterize the limits on efficiency in such a general equilibrium, and show that a sufficiently rich set of group types can ensure the existence of an efficient equilibrium.

Generalized Arrow-Pratt Theory

Given a utility defined on a Hilbert outcome space, we define at each outcome a generalized Arrow-Pratt (GAP) coefficient belonging to the Hilbert space. Comparing the risk aversion of such utilities using their GAP coefficients is equivalent to doing so in terms of other standard, decision-theoretically persuasive, criteria. The resulting GAP theory of risk aversion significantly expands the scope of the classical Arrow-Pratt theory by admitting a large class of risks with vector outcomes. This allows the theory to address risks that are embodied in a significant class of random processes. The GAP theory's implications are studied in five contexts with Hilbert outcome spaces, namely, the theories of portfolio choice, insurance, asset valuation, auctions and moral hazard in teams. We also show a duality between utility functions on Euclidean spaces and GAP coefficients. Finally, we provide a theoretically well-founded and computationally tractable method for estimating the expected GAP coefficient from empirical data.

Verifiability and Group Formation in Markets

We consider group formation in markets with asymmetric information. Our model nests standard matching problems, including one-to-one, many-to-one, and many-to-many matching, as well as matching with salaries or contracts and matching with incomplete information. Prices for group positions and private goods as well as the groups that form are determined endogenously in equilibrium, as a result of demand and supply forces. The setup includes problems as diverse as moral hazard in teams, screening on ability, and mechanism design. Our analysis, including the definition of equilibrium and existence, revolves around the randomness in matching. Our main results characterize the limits on efficiency in such a general equilibrium, and show that a sufficiently rich set of group types can ensure the existence of an efficient equilibrium.

Moral hazard resolved by common-knowledge in principal-agent model

This paper investigates the role of common-knowledge in the principal-agent model under uncertainty. We treat the problem: How epistemic conditions will be able to settle a moral hazard in team in the principal-agent model under uncertainty. We shall propose a resolution programme for the moral hazard in the principal-agent model by common-knowledge. Let us assume that the agents have the knowledge structure induced from a binary relation associated with the multi-modal logic S5n or S4n. We show that the moral hazard can be resolved in the principal-agent model under uncertainty if the agents commonly know all their own costs.

Collaborating

This paper examines moral hazard in teams over time. Agents are collectively engaged in a project whose duration and outcome are uncertain, and their individual efforts are unobserved. Free-riding leads not only to a reduction in effort, but also to procrastination. Collaboration among agents dwindles over time, but does not cease as long as the project has not succeeded. In addition, the delay until the project succeeds, if it ever does, increases with the number of agents. We show why deadlines, but not necessarily better monitoring, help to mitigate moral hazard. (JEL D81, D82, D83)

Comparative Riskiness of Random Vector Outcomes

One lottery over a vector outcome space is said to be riskier than another if every risk averse decision-maker prefers the latter to the former. We consider two other criteria for making such comparisons, one of which is a generalization of second-order stochastic dominance. Our main result is that all these criteria are equivalent for every convex vector outcome space. If the outcome space is also given appropriate topological structure, then lotteries with comparable riskiness have identical weak means; if it is also suitably ordered, then lotteries with comparable riskiness also have comparable sets of risk premia. These results bring a host of new applications within the ambit of the theory of comparative riskiness, most notably models featuring risk embodied in random processes. We illustrate this usefulness with applications to the theories of auctions, utility regulation, inventory control, portfolio choice, public goods and moral hazard in teams.

Futures market: contractual arrangement to restrain moral hazard in teams

Holmstrom (Bell J Econ 13:324–340, 1982) argues that a principal is required to restrain moral hazard in a team: wasting output in certain states is required to enforce efficient effort, and the principal is a commitment device for the waste. Under competition in commodity and team-formation markets, I extend his model à la Prescott and Townsend (Econometrica 52(1):21–45, 1984) to show that competitive contracts can exploit the futures market to transfer output across states instead of wasting it. Thus, the futures market takes the place of a principal as a commitment device. Exploiting the duality of linear programming, I characterize the market environment and the contractual agreements for incentive-constrained efficiency.

Contract Law and Development

We relate the design of contract law to the process of development. In this paper, contract law denes which types of private agreements are enforceable (i.e. are binding and enforced by courts) and which are not. More specically, we consider an economy where agents face a hold-up problem (moral hazard in teams). The resulting timeinconsistency problem leads to ineciently low levels of eort and trading among agents. The solution to this problem requires a social contract which meets two conditions: (i) an economy-wide delegate (judge) responsible for the enforcement of the social contract and (ii) a set of non-enforceable private contracts (regulation). However, because this mechanism is costly, its eectiveness depends on the aggregate production of the economy. To capture the interaction between contract enforcement and development, we introduce a multi-period economy and show that, in the early stages of development, the mechanism is infeasible. The appearance of enforcement institutions and regulation is delayed for the later stages. At this point of time, the hold-up problem is solved and this spurs economic growth further. Finally, the relationship between economic development and the evolution of contract law may be non-monotonic, which may explain why empirical studies fail to nd a robust relationship between the two.

'Is That a Gun in Your Pocket... ?' Advertising and Evaluation

Candidates to a profitable privilege (e.g. an inventor) try to convince a decision maker (e.g. a patent examiner) of their distinctive value. The better candidates often exert higher signaling effort in order to differentiate from less valuable candidates. When the decision maker must also exert effort in order to understand the candidate, moral hazard in team is likely to happen. Therefore, one might expect lower signaling effort in equilibrium. I show that this intuition is false because less valuable candidates can manipulate the moral hazard problem of the decision maker. By exerting higher signaling effort, low quality candidates raise the cost of effort of the decision maker who is then likely to shirk. When the gains from differentiation are big, the better candidates set their effort level in order to overbid the less valuable candidates' mimicking efforts. This may lead both the former and the decision maker to overexert effort in equilibrium compared to what would be socially desirable.

Moral hazard and free riding in collective action

Most political and economic theorists point to moral hazard in teams as the main obstacle to lobbies’ collective action. In this paper, we address this important issue with a coalition-formation game. In the process of doing so, we characterize equilibrium lobby structures both in the absence and in the presence of moral hazard. Three notable results emerge from such an exercise: (1) an equilibrium lobby structure exists under both specifications of the model, (2) moral hazard in teams may raise large groups’ equilibrium lobby size, and (3) it may also raise the level of collective action of large groups with low organizational costs.

Relational Incentives and Moral Hazard in Teams

This paper studies moral hazard in teams using a model where efforts are promoted via the combination of profit shares and relational contracts. The focus is on how these two forms of incentives interact. According to the degree of effort observability and the importance of future interaction, the optimal allocation of profit shares can range from a wide dispersion across players to a full concentration of shares in the hands of a single player. When shares are sufficiently concentrated, the corresponding residual claimant can also adopt the role of administering all relational contracts, therefore serving as an endogenously chosen principal.

Modes of Communication

The paper develops a theory of costly communication in which the sender’s and receiver’s motivations and abilities endogenously determine the communication mode and the transfer of knowledge. Communication is modeled as a problem of moral hazard in teams, in which the sender and receiver select persuasion and message elaboration efforts. The model is shown to provide a rich set of insights concerning (i) the impact of incentive alignment on communication strategies, (ii) the relative influence and the complementarity/substitutability between issue‐relevant communication and cues (information that relates to the credibility of the sender rather than to the issue at stake), and (iii) the path dependency of communication.

Optimal Team Contracts

In this paper, the authors evaluate certain challenges put forth by Mukesh Eswaran and Ashok Kotwal (1984) and Eric Rasmusen (1987) concerning the legitimacy of Bengt Holmstrom's (1982) proposed solution for the problem of moral hazard in teams. They demonstrate that the argument put forth by Rasmusen hinges on some rather extreme conditions concerning the verifiability of individual actions relating to renegotiation attempts; relaxing these conditions renders efficient budget-balancing contracts infeasible, as argued by Holmstrom. Second, the authors demonstrate that the criticism put forth by Eswaran and Kotwal is invalid, at least if one insists that clandestine deals must satisfy the same incentive-compatibility conditions required of the principal-agent contract proposed by Holmstrom.

The Moral Hazard of Budget-Breaking

It has recently been suggested in the agency literature that moral hazard in teams can be dealt with by introducing a third party who breaks the budget-balancing constraint, and that this facilitates the design of contracts that can sustain the Pareto optimum as a (perfect) Nash equilibrium. This note offers an explanation for why the use of budget-breaking schemes is not so widespread as that of active monitoring, despite the fact that such schemes would save the resources expended on supervision. The note demonstrates that allowing the budget to be broken introduces the potential for moral hazard on the part of the third party, which could render the proposed equilibrium incredible.

Moral Hazard in Teams

This article studies moral hazard with many agents. The focus is on two features that are novel in a multiagent setting: free riding and competition. The free-rider problem implies a new role for the principal: administering incentive schemes that do not balance the budget. This new role is essential for controlling incentives and suggests that firms in which ownership and labor are partly separated will have an advantage over partnerships in which output is distributed among agents. A new characterization of informative (hence valuable) monitoring is derived and applied to analyze the value of relative performance evaluation. It is shown that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally. Competition per se is worthless. The role of aggregate measures in relative performance evaluation is also explored, and the implications for investment rules are discussed.