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EC2A3 > 9. Asymmetric information - Moral Hazard > Flashcards

9. Asymmetric information - Moral Hazard Flashcards

1
Q

What is Moral Hazard?

A

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

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2
Q

Give examples of Moral Hazrad

A
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3
Q

Moral hazard and the principal agent problem

A
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4
Q

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

A
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5
Q

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

A
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6
Q

Decision making for the agent
Step by step

A

.

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7
Q

Principal Agent model assumptions

A
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8
Q

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

A
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9
Q

Principal Agent Model:

A
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10
Q

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

A
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11
Q

What is the principals indifference curve?

A

.

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12
Q

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

A
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13
Q

What are the indifference curves of the agent?

A

.

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14
Q

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?

A
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15
Q

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

A
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16
Q

Full information case utility curve

A
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17
Q
A
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18
Q

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?

A
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19
Q

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

A
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20
Q

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

A
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21
Q

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

22
Q

The work of Leonid Hurwicz

23
Q

Asymmetric information utility curves and the wages offered

25
Q

Asymmetric information
* Risk for principal
* Consequences for the princial

26
Q

Asymmetric information
* Agency cost on a diagram

27
Q

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

28
Q

Why is x imperfect

29
Q

What is the agency cost?
Risk sharing

30
Q

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

31
Q

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

Any exceptions?

32
Q

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

33
Q

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

34
Q

The work of Fernie and Metcalf: Performance related pay

35
Q

Collateral

36
Q

Monitoring

37
Q

Evidence of moral hazard:
* Uber and Taxis

38
Q

Top section of slide 42

39
Q

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

40
Q

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

41
Q

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

42
Q

How to mitigate Moral hazard in teams?

43
Q

Intrinsic motivation
* Motivation crowding out

44
Q

Why might effort be crowded out?

45
Q

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

46
Q

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

A
  • Piece rate (This is an example of performance related pay)
  • Bonuses and promotions as motivators
47
Q

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

A
  • 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
48
Q

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

A
  • 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
49
Q

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

A
  • 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
50
Q

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

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

EC2A3 (10 decks)

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