A free-rider problem with a free-riding principal
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In a moral hazard problem caused purely by joint production and not by uncertainty, we examine the problem faced by a principal who actively participates in production along with a group of agents. We show that, when designing the optimal output sharing rule, the principal need not look for anything more complicated than the frequently observed simple linear or piecewise linear rules. We also confirm the presence of a friction between the principal’s residual claimant role and her incentive to free-ride in the production process that prohibits her from completely mitigating the moral hazard problem.
JEL classificationD21 D23 L22
KeywordsPrincipal Agent(s) Moral hazard Payment function Output sharing rule Noncooperative game of production Optimal outcome
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