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Optimal incentive contracts with hidden savings

Posted on:2010-02-06Degree:Ph.DType:Thesis
University:The University of ChicagoCandidate:Paweenawat, ArchawaFull Text:PDF
GTID:2449390002484503Subject:Economics
Abstract/Summary:
This thesis studies the moral hazard problem with hidden savings. Prior works on the principal-agent problem usually assume that an agent's savings and borrowings are observable to a principal and contractible. However, this assumption is restrictive, especially for observable savings. The information on a household's borrowings from formal lenders is usually collected by some institutions, such as the credit bureau. Even for a household's borrowings from informal lenders, there often are some forms of contracts due to the repayment problem. As a result, to some extent, the agent's borrowings are observable. A household's savings, on the other hand, are much harder to observe, since a household can choose not to disclose its savings. Moreover, a household can simply keep its wealth inside the house. Therefore, the assumption of hidden savings seems more plausible.;The first chapter considers the moral hazard problem with single agent. I show how an agent's hidden access to the credit market changes the structure of the optimal contract and the benefit of a principal's commitment. When the agent can secretly save and borrow, there is no renegotiation-proof contract that can implement high effort level in period 2. However, if the principal can commit not to renegotiate with the agent in period 2, he can offer the contract that can implement high effort level. Finally, I show that when the agent can secretly save but cannot secretly borrow, there exists a unique renegotiation-proof contract that can implement high effort level.;The second chapter considers the moral hazard problem with multiple agents. I compare the relative benefit of two incentive contracts, namely, the relative performance evaluation and the group evaluation. On the one hand, under the relative performance evaluation, the principal can prevent the agents from colluding. Therefore, the relative performance evaluation provides the agents with better incentive. On the other hand, under the group evaluation, the agents can coordinate their effort levels and share their consumption. Therefore, the group evaluation provides the agents with better risk-sharing. The contribution of this chapter is to provide an understanding of how hidden savings change the relative benefits of the optimal incentive contracts.
Keywords/Search Tags:Hidden savings, Incentive contracts, Moral hazard problem, Optimal, Implement high effort level, Relative performance evaluation, Agent
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