Audenrode, Marc van: Moral Hazard and Limited Liability
World Conference Econometric Society, 2000, Seattle

Jacques Lawarree, University of Washington
Marc van Audenrode, Universite Laval
Moral Hazard and Limited Liability
Session: C-11-23  Tuesday 15 August 2000  by Audenrode, Marc van
Real world contracts limit the liabilities of agents by imposing constraints on their transfers or on their utilities. In an adverse selection model, Sappington (1983) has shown that the two constraints yield an equivalent problem for the principal. We show that this result does not hold in a moral hazard framework. More specifically, we show that restrictions on the utilities are stronger in the sense that they yield a lower level of effort from the agent. Moreover, given an optimal contract constrained by a limited liability on utility, one can always find a Pareto dominating contract constrained by a limited liability on transfers.
Submitted paper full-text in .pdf


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