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Economic design

, Volume 1, Issue 1, pp 227–250 | Cite as

A free-rider problem with a free-riding principal

  • Shasikanta Nandeibam
Article
  • 70 Downloads

Abstract

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 classification

D21 D23 L22 

Keywords

Principal Agent(s) Moral hazard Payment function Output sharing rule Noncooperative game of production Optimal outcome 

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Copyright information

© Elsevier Science B.V 1994

Authors and Affiliations

  • Shasikanta Nandeibam
    • 1
  1. 1.Department of EconomicsUniversity of BirminghamEdgbaston, BirminghamUK

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