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Unformatted text preview: Information Asymmetry: Moral Hazard Principal/Agent Problem (Why, When, Examples?) a. P & A have different utility functions Why? b. Information asymmetry – A’s effort isn’t observable c. Outcome is uncertain d. Perfect continuous monitoring is not costless Model of incentive compensation: w = a + b ( e + x + gy ) where w = wage (e+x+gy) = outcome (e.g.,company profit) e = agent controlled; (x+y) = state of nature -> not agent controlled e = (unobserved by principal) effort; x = unobserved exogenous effects on outcomes y = observed exogenous effects a = the base salary b =the intensity of incentives provided to the employee....
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This note was uploaded on 10/05/2011 for the course ACG 5637 taught by Professor Monikacaushoulli during the Fall '08 term at University of Florida.
- Fall '08