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

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.

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An Uncertain Wage Contract Model with Adverse Selection and Moral Hazard

Journal of Applied Mathematics ◽

10.1155/2014/282867 ◽

2014 ◽

Vol 2014 ◽

pp. 1-9 ◽

Cited By ~ 2

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.

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When Salespeople Manage Customer Relationships: Multidimensional Incentives and Private Information

Journal of Marketing Research ◽

10.1177/0022243719847661 ◽

2019 ◽

Vol 56 (5) ◽

pp. 749-766 ◽

Cited By ~ 5

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.

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The Incentive Model in Supply Chain with Trade Credit and Default Risk

Complexity ◽

10.1155/2019/5909785 ◽

2019 ◽

Vol 2019 ◽

pp. 1-11

Author(s):

Hong Cheng ◽

Yingsheng Su ◽

Jinjiang Yan ◽

Xianyu Wang ◽

Mingyang Li

Keyword(s):

Supply Chain ◽

Asymmetric Information ◽

Moral Hazard ◽

Private Information ◽

Default Risk ◽

Trade Credit ◽

Uncertain Demand ◽

Market Demand ◽

Incentive Contract ◽

Risk Neutral

Trade credit is widely used for its advantages. However, trade credit also brings default risk to the manufacturer due to the uncertain demand. And moral hazard may aggravate the default risk. The purpose of this paper is to investigate the role of moral hazard in trade credit and explore incentive contract under uncertain demand and asymmetric information. We consider a two-echelon supply chain consisting of a risk-neutral retailer ordering a single product from a risk-neutral manufacturer. Market demand is stochastic and is influenced by retailer’s sales effort which is his private information. Incentive theory is used to develop the principal-agent model and get the incentive contract from the manufacturer’s perspective. Results show that the retailer will reduce his effort level to get more profit and the manufacturer’s profit will be reduced, in the case of asymmetric information. Facing this result, the manufacturer will reduce the order quantity in incentive contract to lessen his losses. Numerical examples are provided to illustrate all these theoretical results and to draw managerial insights.

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

Advanced Materials Research ◽

10.4028/www.scientific.net/amr.204-210.1569 ◽

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.

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

Review of Law & Economics ◽

10.1515/rle-2021-0013 ◽

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.

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AGENCY PROBLEM DALAM PENERAPAN PEMBIAYAAN AKAD MUDHARABAH PADA PERBANKAN SYARIAH

ALQALAM ◽

10.32678/alqalam.v33i1.384 ◽

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).

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