Other-Regarding Principal and Moral Hazard

Banerjee, Swapnendu; Sarkar, Mainak

doi:10.2139/ssrn.2294347

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Other-Regarding Principal and Moral Hazard

12 Pages Posted: 16 Jul 2013

See all articles by Swapnendu Banerjee

Swapnendu Banerjee

Jadavpur University, Department of Economics; Jadavpur University, Calcutta

Mainak Sarkar

Jadavpur University - Department of Economics

Date Written: July 10, 2013

Abstract

Using the classic moral hazard problem with limited liability we characterize the optimal contracts when an other-regarding principal interacts with a self-regarding agent. The optimal contract differs considerably when the principal is ‘inequity averse’ vis-a-vis the self-regarding case. Also the agent is generally (weakly) better-off under an ‘inequity- averse’ principal compared to a ‘status seeking’ principal.

Keywords: other regarding preferences, self regarding preferences, inequity-averse, status- seeking, optimal contract

JEL Classification: D86, D63, M52

Suggested Citation: Suggested Citation

Banerjee, Swapnendu and Sarkar, Mainak, Other-Regarding Principal and Moral Hazard (July 10, 2013). Available at SSRN: https://ssrn.com/abstract=2294347 or http://dx.doi.org/10.2139/ssrn.2294347