Double Moral Hazard, Monitoring, and the Nature of Contracts

@article{Agrawal2002DoubleMH,
  title={Double Moral Hazard, Monitoring, and the Nature of Contracts},
  author={Pradeep Agrawal},
  journal={Journal of Economics},
  year={2002},
  volume={75},
  pages={33-61}
}
generalized double-sided moral-hazard model, with risk-averse parties who mutually monitor each other (to get a reasonable idea of outcome/effort). The model considers trade-off between monitoring costs and moral hazard costs, which are endogenously determined by the extent of monitoring.Using this model, we formally prove a generalized version of Coase's conjecture – that the optimal contract minimizes the agency and risk costs. We then show how varying assumptions about the feasibility or… CONTINUE READING

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