Moral Hazard and Bargaining over Incentive Contracts

Arbeitspapier

This paper analyses bargaining over an incentive compatible contract in a moral hazard framework. We introduce the Kalai-Smorodinsky bargaining solution and compare the outcome with the commonly applied Nash solution. Whether worker's effort is higher in the Nash or the Kalai-Smorodinsky solution depends on the agents. bargaining power. If agents have equal bargaining power, the contract in the Kalai-Smorodinsky solution yields a more efficient outcome and induces more effort. The social planner can mitigate inefficiencies arising in both bargaining solutions from the moral hazard problem and even achieve the first-best outcome by allocating the agents' bargaining power. If raising the worker's bargaining power is necessary to achieve the first-best solution, this increase must be higher in the Nash solution than in the Kalai-Smorodinsky solution.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 4920

Classification and Topics

• Classification: Wirtschaft ; Cooperative Games ; Asymmetric and Private Information; Mechanism Design ; Labor Contracts
• Subject: incentive contracts ; moral hazard ; Nash bargaining solution ; Kalai-Smorodinsky solution ; bargaining power

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Dittrich, Marcus ; Städter, Silvio
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/102202
• Last update: 10.03.2025, 11:41 AM CET