Optimal Investment by the Principal in Order to Increase the Probability of Favourable States of Nature in the Principal-Agent Model with Moral Hazard

Many ethical problems in business can be characterized as having elements of incomplete and/or asymmetric information. This paper analyzes such problems using information economics and the principal-agent model. It defines the nature of moral problems in business and then applies principal-agent models involving adverse selection and moral hazard to these problems. Possible solutions to conditions of information asymmetry are examined in order to support the development of organizational virtue.

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Double-sided moral hazard, information screening and the optimal contract

China Finance Review International ◽

10.1108/cfri-04-2016-0015 ◽

2016 ◽

Vol 6 (4) ◽

pp. 404-431 ◽

Cited By ~ 3

Author(s):

Jin Xue ◽

Yiwen Fei

Keyword(s):

Venture Capital ◽

Moral Hazard ◽

Capital Investment ◽

Principal Agent ◽

Optimal Contract ◽

Fixed Income ◽

Content Type ◽

Agent Model ◽

Venture Capital Investment ◽

Principal Agent Model

Purpose In the practice of venture capital investment, the venture capital will not only claim the share of the enterprise’s future output, but also a certain amount of fixed income. The purpose of this paper is to examine the optimal contract which blends the variable ownership income and the fixed income theoretically so as to provide a keen insight into the venture capital practice. Design/methodology/approach This paper establishes an extended principal-agent model and researches on the design of optimal contract dominated by venture capital with double-sided moral hazard and information screening. Findings By establishing theoretical models, the main findings are: first, high-quality enterprise tends to relinquish less ownership but give more fixed return to the venture capital as compensation in order to obtain the venture capital financing; second, low-quality enterprise is willing to relinquish more ownership but give less fixed return to the venture capital for financing; third, due to the existence of double-sided moral hazard, neither of the venture capital and the enterprise will exert their best effort. Originality/value This paper furthers the application of principal-agent model in the field of venture capital investment and researches on the optimal contract, considering double-sided moral hazard and adverse selection at the same time originally.

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Screening Versus Sorting in a Principal-Agent Model with Moral Hazard and Adverse Selection

SSRN Electronic Journal ◽

10.2139/ssrn.1659935 ◽

2010 ◽

Author(s):

Rajiv D. Banker ◽

Shaopeng Li ◽

Jose M. Plehn-Dujowich

Keyword(s):

Moral Hazard ◽

Adverse Selection ◽

Principal Agent ◽

Agent Model ◽

Principal Agent Model

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Asymmetric awareness and heterogeneous agents

Rationality and Society ◽

10.1177/1043463120963403 ◽

2020 ◽

Vol 32 (4) ◽

pp. 461-484

Author(s):

Antoine Dubus

Keyword(s):

Moral Hazard ◽

Heterogeneous Agents ◽

Contract Design ◽

The Other ◽

Principal Agent ◽

Optimal Contract ◽

Jel Codes ◽

Agent Model ◽

Principal Agent Model

We consider a principal-agent model with moral-hazard and asymmetric awareness and show how the heterogeneity of agents on their aversion to effort affects contract design. We discuss the optimal contract adopted when a principal is aware of all the impacts of an agent’s action, while agents ignore some of them. When a principal faces two types of agents, where one type is more effort-averse than the other, the equilibrium contract is shaped by agent proportions: it pools the agents, separates them, or excludes the more effort-averse agents from the contract. When efforts are observable, all the agents remain unaware, while when efforts are hidden, a principal increases the awareness of the agents to a level commensurate with the nature of the contract. JEL Codes – D82; D83; D86

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Binary Payment Schemes: Moral Hazard and Loss Aversion

The American Economic Review ◽

10.1257/aer.100.5.2451 ◽

2010 ◽

Vol 100 (5) ◽

pp. 2451-2477 ◽

Cited By ~ 109

Author(s):

Fabian Herweg ◽

Daniel Müller ◽

Philipp Weinschenk

Keyword(s):

Moral Hazard ◽

Expected Utility ◽

Loss Aversion ◽

Reference Point ◽

Performance Measure ◽

Principal Agent ◽

Optimal Contract ◽

Agent Model ◽

Payment Schemes ◽

Principal Agent Model

We modify the principal-agent model with moral hazard by assuming that the agent is expectation-based loss averse according to Kőoszegi and Rabin (2006, 2007). The optimal contract is a binary payment scheme even for a rich performance measure, where standard preferences predict a fully contingent contract. The logic is that, due to the stochastic reference point, increasing the number of different wages reduces the agent's expected utility without providing strong additional incentives. Moreover, for diminutive occurrence probabilities for all signals the agent is rewarded with the fixed bonus if his performance exceeds a certain threshold. (JEL D82, D86, J41, M52, M12)

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