Journal of Regulatory Economics

, Volume 48, Issue 1, pp 53–73 | Cite as

Work environment and moral hazard

Original Article


We consider a firm’s provision of safety and health measures (working conditions) in a hidden action agency problem in which effort and working conditions interact in multiplicatively separable (neutral) manner in the cash flow process. Under this common formulation, the firm under supplies working conditions and effort at its second best, regardless of the share of accident damages borne by the firm. At this optimum, increases in the damage share paid by the firm decrease the compensation to the agent so as to render working conditions and effort unchanged. Shifting the damage share then does not impact the firm’s or the agent’s welfare. We show that direct regulation of working conditions can improve total surplus, but that the regulation of the damage share is ineffectual. Under first order approximations, we also examine the effects of changes in the hazard level of the job and the efficiency of working conditions. Finally, we show that our results can be changed if the neutral interaction between effort and working conditions is violated.


Worker safety Moral hazard Regulation 

JEL Classification

L2 J32 J33 M5 M12 



I thank the Marshall School of Business for generous research support. Ricardo Alonso, Odilon Camara, Yanhui Wu and an anonymous referee provided valuable advice and comments.


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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Marshall School of BusinessUniversity of Southern CaliforniaLos AngelesUSA

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