The Effects of Interim Performance Evaluations under Risk Aversion

This paper reconsiders the applicability of a recently posed theoretical result concerning the optimality of not providing interim performance evaluations to the agent when implementing a given amount of total effort. The model used by Lizzeri, Meyers and Persico (2002) under the assumption of a risk neutral agent restricted by limited liability is analyzed when the agent is risk averse to show that interim performance evaluations do matter in reducing contract costs. In particular, they enable the principal to transfer the burden of insuring the agent against risk to the agent herself. Hence, the same incentives can be provided without as much consumption smoothing once performance information is revealed. On the other hand, when the incentive scheme is fixed, the risk averse agent may find it optimal to exert a greater amount of effort when performance evaluations are not revealed so as to insure herself against the possible losses that come with unexpected bad outcomes.Performance Evaluation; Dynamic Contracts

Information in tournaments under limited liability

The problem of designing tournament contracts under limited liability and alternative performance measures is considered. Under risk neutrality, only the best performing agent receives an extra premium if the liability constraint becomes binding. Under risk aversion, more than one prize is awarded. In both situations, performance measures can be ranked if their likelihood ratio distribution functions differ by a mean preserving spread. The latter result is applied to questions of contest design and more general forms of relative performance payment.contest, information, likelihood ratio distribution, tournament

Determinants of Moral hazard in Microfinance: Empirical Evidence from Joint Liability Lending Schemes in Malawi

Moral hazard is widely reported as a problem in credit and insurance markets, mainly arising from information asymmetry. Although theorists have attempted to explain the success of Joint Liability Lending (JLL) schemes in mitigating moral hazard, empirical studies are rare. This paper investigates the determinants of moral hazard among JLL schemes from Malawi, using group level data from 99 farm and non-farm credit groups. Results reveal that peer selection, peer monitoring, peer pressure, dynamic incentives and variables capturing the extent of matching problems explain most of the variation in the incidence of moral hazard among credit groups. The implications are that Joint Liability Lending institutions will continue to rely on social cohesion and dynamic incentives as a means to enhancing their performance which has a direct implication on their outreach, impact and sustainability.moral hazard, joint liability, dynamic incentives, group lending, Malawi, Financial Economics,

Repeated moral hazard and contracts with memory: A laboratory experiment

This paper reports data from a laboratory experiment on two-period moral hazard problems. The findings corroborate the contract-theoretic insight that even though the periods are technologically unrelated, due to incentive considerations principals can benefit from offering long-term contracts that exhibit memory

Why it Pays to Conceal - On the Optimal Timing of Acquiring Verifiable Information

We consider optimal contracts when a principal has two sources to detect bad projects. The first one is an information technology without agency costs ($$), whereas the second one is the expertise of an agent subject to moral hazard, adverse selection and limited liability ($IT_A$). First, we show that the principal does not necessarily benefit from access to additional information and thereby may prefer to ignore it. Second, we discuss different timings of information release, i.e. a \emph{disclosure} contract offered to the agent after the principal announced the result of $$, and a \emph{concealment} contract where the agent exerts effort before $IT_{P}$ is checked. We find that oncealment is superior whenever the quality of $IT_{P}$ is sufficiently low. Then, $IT_{P}$ is almostworthless under a disclosure contract, while it can still be exploited to reduce the agent''s information rent under concealment. If the quality of $$ improves, disclosure can be superior as it allows to adjust the agent''s effort to the up-dated expected quality of the project. However, even for a highly informative $IT_{P}$, concealment can be superior as itmitigates the adverse selection problem. Finally, we prove that the principal always benefits from checking $IT_P$ \textit{if} he chooses the optimal timing of information release. In particular, he may benefit only if he does not check $IT_P$ until the agent reported his findings.management information;

Competition, risk neutrality and loan commitments

Credit;monetary economics

The economics of information and piecewise linear limited liability profit sharing contracts

This thesis makes a theoretical contribution to the design of profit-sharing contracts which maximise the surplus a principal extracts from an agency relationship, whereby a pay floor limits the liability of an agent in low profit states, and information is either unilaterally or bilaterally asymmetric. [Continues.

Simple contracts with adverse selection and moral hazard

We study a principal-agent model with moral hazard and adverse selection. Risk-neutral agents with limited liability have arbitrary private information about the distribution of outputs and the cost of effort. We show that under a multiplicative separability condition, the optimal mechanism offers a single contract. This condition holds, for example, when output is binary. If the principal’s payoff must also satisfy free disposal and the distribution of outputs has the monotone likelihood ratio property, the mechanism offers a single debt contract. Our results generalize if the output distribution is “close” to multiplicatively separable. Our model suggests that offering a single contract may be optimal in environments with adverse selection and moral hazard when agents are risk neutral and have limited liability