lecture26 - Economics 101A(Lecture 26 Stefano DellaVigna...

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Economics 101A (Lecture 26) Stefano DellaVigna April 30, 2009
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Outline 1. Asymmetric Information: Introduction II 2. Hidden Action (Moral Hazard)
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1 Asymmetric Information: Intro- duction In the examples cited in last lecture, common struc- ture Principal would like to observe e ff ort (of worker, of CEO, of driver) Unfortunately, this is not observable Only a related, noisy proxy is observable: output, accident, success Contract o ff ered by principal is function of this proxy This means that occasionally an agent that put a lot of e ff ort but has bad luck is ‘punished’
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Also, agents that shirked may instead be compen- sated These principle-agent problems are called hidden ac- tion or moral hazard
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Second category (next lecture): hidden type or ad- verse selection Example 1: Manager and worker Manager employs worker and o ff ers wage Worker can be hard-working or lazy Example 2: Car Insurance Car insurance company o ff ers insurance contract Drivers ex ante can be careful or careless Example 3: Shareholders and CEO Shareholders choose compensation for CEO CEO is high-quality or thief
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Problem is similar (action is not observed), but with a twist Hidden action : principal can convince agent to exert high e ff ort with the appropriate incentives Hidden type : agent’s behavior is not a ff ected by incentives, but by her type Di ff erent task for principal: Hidden action : Principal wants to incentivize agent to work hard Hidden type : Principal wants to make sure to recruit ‘good’ agent, not ‘bad’ one Two look similar, but analysis is di ff erent Start from Hidden Action
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2 Hidden Action (Moral Hazard) Nicholson, Ch. 18, pp. 632-637 [ NOT in 9th Ed.] Example 3: Shareholders and CEO Division of ownership and control Shareholders (owners of fi rm): Have capital, but do not have time to run com- pany themselves Want
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