Multitasking, Multidimensional Screening, and Moral Hazard with Risk Neutral Agents

Abstract

In this paper we consider a model where a risk-neutral principal devises a contract for a risk neutral agent who can exert effort along different dimensions. On the top of that the agent possesses multidimensional private information about her cost of effort. We show that as long as effort is exerted along different dimensions that exceed in number the available performance measures, hidden action prevents implementing the second best solution, obtained under pure adverse selection situation, even if both parties are risk neutral and private information of the agent is not correlated with the production technology. Therefore, hidden action leads to additional welfare loss. The result implies that it can be more efficient to compensate employees on the basis of a variety of performance measures rather than base their compensation on a "bottom-line" measure (e.g. their contribution to the company's profits).

Keywords: multitasking, multi-dimensional screening, moral hazard

JEL Classification: D82