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Journal ArticleDOI

Moral Hazard in Teams

Bengt Holmstrom
- 01 Jan 1982 - 
- Vol. 13, Iss: 2, pp 324-340
TLDR
In this article, the authors study moral hazard with many agents and focus on two features that are novel in a multiagent setting: free riding and competition, and show that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally.
Abstract
This article studies moral hazard with many agents. The focus is on two features that are novel in a multiagent setting: free riding and competition. The free-rider problem implies a new role for the principal: administering incentive schemes that do not balance the budget. This new role is essential for controlling incentives and suggests that firms in which ownership and labor are partly separated will have an advantage over partnerships in which output is distributed among agents. A new characterization of informative (hence valuable) monitoring is derived and applied to analyze the value of relative performance evaluation. It is shown that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally. Competition per se is worthless. The role of aggregate measures in relative performance evaluation is also explored, and the implications for investment rules are discussed.

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Citations
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Organizations and Trade

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Product market power, industry structure, and corporate earnings management

TL;DR: The authors found that firms with inferior product market pricing power engage in greater discretionary earnings accruals, adding a new dimension to our understanding of the transparency and informativeness of firms' financial statements.
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What’s in an education? Implications of CEO education for bank performance

TL;DR: In this article, the authors find evidence that banks led by CEOs with MBAs outperform their peers when compensation structures are geared towards greater risk-taking incentives, and when banks follow riskier or more innovative business models.
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Privatization in Eastern Europe: Irreversibility and critical mass effects

TL;DR: In this paper, the authors proposed a model to shed light on two important policy features of privatization in Central and Eastern Europe: the idea of a necessary critical mass of privatization on one hand, and the great difficulties encountered in the actual privatization process on the other.
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Moral Hazard and Other-Regarding Preferences

TL;DR: In this article, the authors combine the standard moral hazard models of principal-agent relationships with theories of other-regarding preferences, in particular, inequity aversion theory, to obtain new theoretical insights into organizational behavior.
References
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Posted Content

Production, information costs, and economic organization

TL;DR: In this paper, the authors present a set of reprint articles for which IEEE does not hold copyright. Full text is not available on IEEE Xplore for these articles, but full text can be found on the Internet Archive.
Journal ArticleDOI

Moral Hazard and Observability

TL;DR: In this article, the role of imperfect information in a principal-agent relationship subject to moral hazard is considered, and a necessary and sufficient condition for imperfect information to improve on contracts based on the payoff alone is derived.
Posted Content

The Economic Theory of Agency: The Principal's Problem.

TL;DR: The canonical agency problem can be posed as follows as discussed by the authors : the agent may choose an act, aCA, a feasible action space, and the random payoff from this act, w(a, 0), will depend on the random state of nature O(EQ the state space set), unknown to the agent when a is chosen.
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Reexamination of the perfectness concept for equilibrium points in extensive games

TL;DR: The concept of perfect equilibrium point has been introduced in order to exclude the possibility that disequilibrium behavior is prescribed on unreached subgames [Selten 1965 and 1973]. Unfortunately this definition of perfectness does not remove all difficulties which may arise with respect to unreached parts of the game.
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Good News and Bad News: Representation Theorems and Applications

TL;DR: In this article, a notion of "favorableness" of news is introduced, characterized, and applied to four simple models: the arrival of good news about a firm's prospects always causes its share price to rise, more favorable evidence about an agent's effort leads the principal to pay a larger bonus, buyers expect that any product information withheld by a salesman is unfavorable to his product, and bidders figure that low bids by their competitors signal a low value for the object being sold.
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