scholarly journals An Uncertain Wage Contract Model with Adverse Selection and Moral Hazard

2014 ◽  
Vol 2014 ◽  
pp. 1-9 ◽  
Author(s):  
Xiulan Wang ◽  
Yanfei Lan ◽  
Jiao Wang
Keyword(s):  
Moral Hazard ◽  
Adverse Selection ◽  
Private Information ◽  
Equivalent Form ◽  
Optimal Solution ◽  
Uncertain Variable ◽  
Wage Increase ◽  
Effort Level ◽  
Proposed Model ◽  
Wage Contract

This paper considers a wage contract design problem faced by an employer (he) who employs an employee (she) to work for him in labor market. Since the employee's ability that affects the productivity is her private information and cannot be observed by the employer, it can be characterized as an uncertain variable. Moreover, the employee's effort is unobservable to the employer, and the employee can select her effort level to maximize her utility. Thus, an uncertain wage contract model with adverse selection and moral hazard is established to maximize the employer's expected profit. And the model analysis mainly focuses on the equivalent form of the proposed wage contract model and the optimal solution to this form. The optimal solution indicates that both the employee's effort level and the wage increase with the employee's ability. Lastly, a numerical example is given to illustrate the effectiveness of the proposed model.

scholarly journals Regulating a Firm under Adverse Selection and Moral Hazard in Uncertain Environment

2014 ◽  
Vol 2014 ◽  
pp. 1-12 ◽  
Author(s):  
Jing Feng ◽  
Yanfei Lan ◽  
Ruiqing Zhao
Keyword(s):  
Moral Hazard ◽  
Adverse Selection ◽  
Private Information ◽  
Regulatory Policy ◽  
Consumer Surplus ◽  
Market Demand ◽  
Effort Level ◽  
Total Surplus ◽  
Market Capacity ◽  
The Difference

This paper investigates a problem of how to regulate a firm which has private information about the market capacity, leading to adverse selection, and which can increase the market demand by exerting costly effort, resulting in moral hazard. In such a setting, the regulator offers a regulatory policy to the firm with the objective of maximizing a weighted sum of the consumer surplus and the firm’s profit (i.e., the social total surplus). We firstly find that the regulator will set the firm’s effort level as zero under observable effort regardless of the market capacity being full or private information; that is, the effort has no impact on the optimal regulatory policy. Interestingly, we also show that, it is necessary for regulator to consider the difference between the effort’s impact on the demand and the price’s impact on the demand, which may generate different distortion effects about the regulatory policy.

scholarly journals When Salespeople Manage Customer Relationships: Multidimensional Incentives and Private Information

2019 ◽  
Vol 56 (5) ◽  
pp. 749-766 ◽  
Author(s):  
Minkyung Kim ◽  
K. Sudhir ◽  
Kosuke Uetake ◽  
Rodrigo Canales
Keyword(s):  
Moral Hazard ◽  
Adverse Selection ◽  
Customer Relationship Management ◽  
Private Information ◽  
Information Acquisition ◽  
Relationship Management ◽  
Selection Effect ◽  
Sales Performance ◽  
Customer Relationships ◽  
Customer Relationship

At many firms, incentivized salespeople with private information about customers are responsible for customer relationship management. Although incentives motivate sales performance, private information can induce moral hazard by salespeople to gain compensation at the expense of the firm. The authors investigate the sales performance–moral hazard trade-off in response to multidimensional performance (acquisition and maintenance) incentives in the presence of private information. Using unique panel data on customer loan acquisition and repayments linked to salespeople from a microfinance bank, the authors detect evidence of salesperson private information. Acquisition incentives induce salesperson moral hazard, leading to adverse customer selection, but maintenance incentives moderate it as salespeople recognize the negative effects of acquiring low-quality customers on future payoffs. Critically, without the moderating effect of maintenance incentives, the adverse selection effect of acquisition incentives overwhelms the sales-enhancing effects, clarifying the importance of multidimensional incentives for customer relationship management. Reducing private information (through job transfers) hurts customer maintenance but has greater impact on productivity by moderating adverse selection at acquisition. This article also contributes to the recent literature on detecting and disentangling customer adverse selection and customer moral hazard (defaults) with a new identification strategy that exploits the time-varying effects of salesperson incentives.

A decision model for warranted second-hand products considering upgrade level, past age, preventive maintenance and sales volume

2018 ◽  
Vol 24 (4) ◽  
pp. 544-558
Author(s):  
Mohamed N. Darghouth ◽  
Anis Chelbi
Keyword(s):  
Preventive Maintenance ◽  
Decision Model ◽  
Optimal Solution ◽  
Expected Profit ◽  
Sales Volume ◽  
Content Type ◽  
Effort Level ◽  
Warranty Period ◽  
Proposed Model ◽  
The Impact

Purpose The purpose of this paper is to present a decision model for second-hand products to determine the optimal upgrade level, warranty period and preventive maintenance (PM) effort level which maximize the total expected profit generated by the dealer considering any given past age of the product and the effect of the sales volume. Design/methodology/approach A mathematical model is developed to derive the optimal triplet: upgrade level, warranty period and PM effort level, which maximize the total expected profit generated by the dealer for any second-hand product with a given past age. Numerical experimentations have been conducted to investigate the effectiveness of the proposed model and to explore the interactions among the model variables. Findings Numerical experimentations including a sensitivity analysis have been conducted on the model key parameters. The obtained results show that performing PM actions during the warranty period helps the dealers to provide extended warranty for older second-hand products without spending a significant effort on upgrade actions and therefore increase the volume of sales. Also, the interaction between the PM level and the profit margin threshold is demonstrated. Finally, the effect of the sales volume function parameters (the price and warranty elasticity parameters) on the optimal solution is characterized. Research limitations/implications Given the complexity of the profit function to be maximized involving a considerable number of decision variables with different nature, the authors limited the study to the case where the past age of the second-hand product is known. Practical implications The proposed model aims to provide second-hand product dealers with a modeling framework that enables them to have a realistic estimation of the generated profit by integrating the marketing and engineering key parameters of the second-hand product. Originality/value Most of the existing literature dealing with the reliability improvement of second-hand products does not take into account the fact that a realistic estimation of the total profit generated by the dealer requires the consideration of the sales volume. The latter is closely related to the marketing parameters characterized by the warranty period length and the second-hand product selling price. The proposed model introduces the effect of the total sales volume on the total expected profit. The authors also introduce the concept of discrete upgrade levels for a better control of the restoration degree. The authors study the impact of warranty and price elasticity parameters on the optimal solution and the resultant interaction with the customer purchase decision and consequently the sales volume.

Mechanism Design for R&D Outsourcing with Double-Sided Moral Hazard and Double-Sided Adverse Selection

2011 ◽  
Vol 204-210 ◽  
pp. 1569-1574
Author(s):  
Xu Ding ◽  
Wei Dong Meng ◽  
Bo Huang ◽  
Feng Ming Tao
Keyword(s):  
Moral Hazard ◽  
Mechanism Design ◽  
Adverse Selection ◽  
Private Information ◽  
Incentive Mechanism ◽  
Profit Sharing ◽  
Transfer Payment

It is studied that how to use profit sharing arrangement as an incentive mechanism to stimulate both parties of R&D outsourcing to reveal their private information and commit enough R&D resources or efforts. First, it is proved that the double-sided moral hazard in R&D outsourcing can not be totally prevented under traditional profit-sharing arrangement, namely, fixed, proportional or mixed profit-sharing arrangement. And a new mixed profit sharing arrangement is proposed, which is composed of a fixed transfer payment and allocation proportion, and proved to be able to prevent the double-sided moral hazard, and motivate both parties to reveal their private information and commit enough efforts.

A Simple Model of Corporate Fiduciary Duties: With an Application to Corporate Compliance

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
William C. Bunting
Keyword(s):  
Simple Model ◽  
Moral Hazard ◽  
Adverse Selection ◽  
Private Information ◽  
Third Party ◽  
Duty Of Care ◽  
Court System ◽  
Corporate Compliance ◽  
Corporate Loyalty ◽  
Audit Technology

Abstract This article models the duty of care as a response to moral hazard where the principal seeks to induce effort that is costly to the agent and unobservable by the principal. The duty of loyalty, by contrast, is modeled as a response to adverse selection where the principal seeks truthful disclosure of private information held by the agent. This model of corporate loyalty differs importantly with standard adverse selection models, however, in that the principal cannot use available contracting variables as a screening mechanism to ensure honest disclosure and must rely upon the use of an external third-party audit technology, such as the court system. This article extends the model to the issue of corporate compliance and argues that the optimal judicial approach would define the duty to monitor as a subset of due care – and not loyalty – but hold that the usual legal protections provided for due care violations no longer apply.

scholarly journals The Optimal Insurance Policy for the General Fixed Cost of Handling an Indemnity under Rank-Dependent Expected Utility

2015 ◽  
Vol 2015 ◽  
pp. 1-18 ◽  
Author(s):  
Liurui Deng
Keyword(s):  
Moral Hazard ◽  
Cost Function ◽  
Adverse Selection ◽  
Expected Utility ◽  
Optimal Solution ◽  
Linear Functions ◽  
Fixed Cost ◽  
Optimal Insurance ◽  
Initial Wealth ◽  
Rank Dependent Expected Utility

Based on Bernard et al.’s research, we focus on the Pareto optimal insurance design with the insured’s Rank-Dependent Expected Utility (RDEU). Compared with their previous work, our novelties are the more general fixed cost function of the insurer and the discussion of adverse selection and moral hazard. In particular, Bernard et al. only consider the case in which the fixed cost function of handling an indemnity is the linear function. However, the fixed cost function is not just linear functions in real insurance market. So, we explore the more general fixed cost function including both the linear and nonlinear functions. On the other hand, we consider adverse selection and moral hazard which are involved by Bernard et al. Leading adverse selection and moral hazard into our research makes our results more practical and meaningful. Moreover, we provide an insight into the sensitivity of an optimal solution for the insured’s initial wealth and the parameters related to the fixed cost function of handling an indemnity. We further compare the two different utility functions of the insured in terms of influence of optimal policy analysis.

AGENCY PROBLEM DALAM PENERAPAN PEMBIAYAAN AKAD MUDHARABAH PADA PERBANKAN SYARIAH

ALQALAM ◽  
2016 ◽  
Vol 33 (1) ◽  
pp. 46
Author(s):  
Aswadi Lubis
Keyword(s):  
High Risk ◽  
Asymmetric Information ◽  
Human Resources ◽  
Moral Hazard ◽  
Adverse Selection ◽  
Agency Problem ◽  
Agency Problems ◽  
Islamic Banking ◽  
The Public

The purpose of writing this article is to describe the agency problems that arise in the application of the financing with mudharabah on Islamic banking. In this article the author describes the use of the theory of financing, asymetri information, agency problems inside of financing. The conclusion of this article is that the financing is asymmetric information problems will arise, both adverse selection and moral hazard. The high risk of prospective managers (mudharib) for their moral hazard and lack of readiness of human resources in Islamic banking is among the factors that make the composition of the distribution of funds to the public more in the form of financing. The limitations that can be done to optimize this financing is among other things; owners of capital supervision (monitoring) and the customers themselves place restrictions on its actions (bonding).

scholarly journals Wind Farm Cable Connection Layout Optimization with Several Substations

Energies ◽  
2021 ◽  
Vol 14 (12) ◽  
pp. 3615
Author(s):  
Adelaide Cerveira ◽  
Eduardo J. Solteiro Pires ◽  
José Baptista
Keyword(s):  
Energy Production ◽  
Wind Farm ◽  
Programming Model ◽  
Optimal Solution ◽  
Wind Farms ◽  
Green Energy ◽  
Fossil Energy ◽  
Proposed Model ◽  
Short Time ◽  
Cable Connection

Green energy has become a media issue due to climate changes, and consequently, the population has become more aware of pollution. Wind farms are an essential energy production alternative to fossil energy. The incentive to produce wind energy was a government policy some decades ago to decrease carbon emissions. In recent decades, wind farms were formed by a substation and a couple of turbines. Nowadays, wind farms are designed with hundreds of turbines requiring more than one substation. This paper formulates an integer linear programming model to design wind farms’ cable layout with several turbines. The proposed model obtains the optimal solution considering different cable types, infrastructure costs, and energy losses. An additional constraint was considered to limit the number of cables that cross a walkway, i.e., the number of connections between a set of wind turbines and the remaining wind farm. Furthermore, considering a discrete set of possible turbine locations, the model allows identifying those that should be present in the optimal solution, thereby addressing the optimal location of the substation(s) in the wind farm. The paper illustrates solutions and the associated costs of two wind farms, with up to 102 turbines and three substations in the optimal solution, selected among sixteen possible places. The optimal solutions are obtained in a short time.

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