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Moral Hazard

Roy Radner; Prajit Kumar Dutta

Title:
Moral Hazard
Author(s):
Radner, Roy
Dutta, Prajit Kumar
Date:
Type:
Working papers
Department:
Economics
Persistent URL:
Series:
Department of Economics Discussion Papers
Part Number:
664
Publisher:
Department of Economics, Columbia University
Publisher Location:
New York
Abstract:
"The owner of an enterprise wants to put it in the hands of a manager. The profits of the enterprise will depend both on the actions of the manager as well as the environment within which he operates. The owner cannot directly monitor the agent's action nor can he costlessly observe all relevant aspects of the environment. This situation may also last a number of successive periods. The owner and the manager will have to agree on how the manager is to be compensated, and the owner wants to pick a compensation mechanism that will motivate the manager to provide a good return on the owner's investment, net of the payments to the manager. This is the well-known "principal-agent" problem with moral hazard. Some other principal-agent relationships in economic life are: client-lawyer, customer-supplier, insurer-insured and regulator-public utility."
Subject(s):
Economics
Item views
178
Metadata:
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Suggested Citation:
Roy Radner, Prajit Kumar Dutta, 1993, Moral Hazard, Columbia University Academic Commons, http://hdl.handle.net/10022/AC:P:15556.

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