9. Asymmetric information - Moral Hazard

Question 1

What is Moral Hazard?

Answer 1

A pervasive problem that arises in markets when there is a post-contractual information asymmetry about an action

Question 2

Give examples of Moral Hazrad

Answer 2

Question 3

Moral hazard and the principal agent problem

Answer 3

Question 4

What are the conditions that need to be satisfied for moral hazard to be expected?

Answer 4

Question 5

What are the 2 instances in which the principal can observe the agent?
* Full information
* Asymmetric information case

Answer 5

Question 6

Decision making for the agent
Step by step

Answer 6

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Question 7

Principal Agent model assumptions

Answer 7

Question 8

Principal Agent Model: What are the assumptions about the agent?

Answer 8

Question 9

Principal Agent Model:

Answer 9

Question 10

What are the indifference curves (Expected utility) for the principal?
* When the agent has high effort
* When the agent has low effort

Answer 10

Question 11

What is the principals indifference curve?

Answer 11

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Question 12

What are the agent’s indifference curves
* High effort
* Low effort

Answer 12

Question 13

What are the indifference curves of the agent?

Answer 13

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Question 14

Contract design
* What is it called when the agent is observed and what happes to efforts?
* What is it called when the agent is not observed and what happens to efforts?
* What does the principal offer the agent?
* What are the considerations when the principal designs the contract?

Answer 14

Question 15

Participation constraint
* What is the participation constraint?
* What is the constraint for hard-working and lazy agent?

Answer 15

Question 16

Full information case utility curve

Answer 16

Question 17

Answer 17

Question 18

In the full information case, what are the decisions of the principal
* Wages to high and low effort
* What determines whether they require high or low effort?
* Whya re wages not conditioned on profit level?

Answer 18

Question 19

Why can the full information contract not be optimal under Asymmetric information?

Answer 19

Question 20

What is the contract that the principal offers under asymmetric information case?

Answer 20

Question 21

Participation constraints under asymmetric information case:
* Participation constraint
* Incentive compatability constraint

Answer 21

Question 22

The work of Leonid Hurwicz

Answer 22

Question 23

Asymmetric information utility curves and the wages offered

Answer 23

Question 24

Answer 24

Question 25

Asymmetric information * Risk for principal * Consequences for the princial

Answer 25

Question 26

Asymmetric information * Agency cost on a diagram

Answer 26

Question 27

Under Asymmetric information, what are the decisions for the principal?

Answer 27

Question 28

Why is x imperfect

Answer 28

Question 29

What is the agency cost? Risk sharing

Answer 29

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Question 30

Where is there a trade off in the Asymmetric information case?

Answer 30

Question 31

Does the optimal contract achieve Pareto efficiency under the Asymmetric information case? Any exceptions?

Answer 31

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Question 32

What are the exceptions for the poor outcome for the principal in the Asymmetric information case?

Answer 32

Question 33

Equity * What is the impact of inequality? * What is equity-efficiency trade off? * Reducing moral hazard

Answer 33

Question 34

The work of Fernie and Metcalf: Performance related pay

Answer 34

Question 35

Collateral

Answer 35

Question 36

Monitoring

Answer 36

Question 37

Evidence of moral hazard: * Uber and Taxis

Answer 37

Question 38

Top section of slide 42

Answer 38

Question 39

What if team members were paid based on effort? * Full information

Answer 39

Question 40

What are team members paid if they in an Asymmetric information case?

Answer 40

Question 41

Moral hazard in teams * Why is their moral hazard? * Positive externality

Answer 41

Question 42

How to mitigate Moral hazard in teams?

Answer 42

Question 43

Intrinsic motivation * Motivation crowding out

Answer 43

Question 44

Why might effort be crowded out?

Answer 44

Question 45

Consequences of intrisc motivation * Non-monetary incentives * Mission oriented

Answer 45

Question 46

Lazear (2018) What kinds of incentive pay schemes exist?

Answer 46

* Piece rate (This is an example of performance related pay) * Bonuses and promotions as motivators

Question 47

Lazear (2018) What are tournament incentives? When can they be used?

Answer 47

* Worker who does best recives a promotion * Based on relative performance * Incentivises young workers * Disparity of wages between those above and below should incentivse effort * Agent May encourage more risk taking in order to win tournament * May be demotivated if there are a large number of candidates

Question 48

Lazear (2018) What are team-based incentives? When will they be used?

Answer 48

* If the worker was paid piece rate based, then they would have no incentive to help others. * They are paid partly on the basis of the team output, the worker will now help others

Question 49

Lazear (2018) What are career incentives and how do they limit moral hazard?

Answer 49

* Experience and earnings are positively correlated, therefore underpay younger people to incentivise the old who tend to become less productive as they age. * Requires monitoring

Question 50

Lazear (2018) When is intrinsic motivation used rather than monetary incentives?

Answer 50

* Charitable contributions * Volunteer work * Household work: Rewards are given by immediate family. * Alturism * Enjoyment * Positive work culture