Title:
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Moral Hazard in Repeated Procurement of Services
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Author:
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Esteve González, Patrícia
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Other authors:
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Universitat Rovira i Virgili. Departament d'Economia; Universitat Rovira i Virgili. Centre de Recerca en Economia Industrial i Economia Pública |
Abstract:
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This paper analyzes repeated procurement of services as a four-stage game divided into two periods. In
each period there is (1) a contest stage à la Tullock in which the principal selects an agent and (2) a
service stage in which the selected agent provides a service. Since this service effort is non-verifiable,
the principal faces a moral hazard problem at the service stages. This work considers how the principal
should design the period-two contest to mitigate the moral hazard problem in the period-one service
stage and to maximize total service and contest efforts. It is shown that the principal must take account
of the agent's past service effort in the period-two contest success function. The results indicate that
the optimal way to introduce this `bias' is to choose a certain degree of complementarity between past
service and current contest efforts. This result shows that contests with `additive bias' (`multiplicative
bias') are optimal in incentive problems when effort cost is low (high). Furthermore, it is shown that
the severity of the moral hazard problem increases with the cost of service effort (compared to the cost
of contest effort) and the number of agents. Finally, the results are extended to more general contest
success functions.
JEL classification: C72; D82
Key words: Biased contests; Moral Hazard; Repeated Game; Incentives. |
Publication date:
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2014 |
Subject (UDC):
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33 - Economia |
Subject(s):
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Jocs no-cooperatius (Matemàtica) |
Rights:
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L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons: http://creativecommons.org/licenses/by-nc-nd/3.0/es/ |
Pages:
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45 p. |
Document type:
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Working Paper |
Published by:
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Universitat Rovira i Virgili. Departament d'Economia
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Collection:
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Documents de treball del Departament d'Economia;2014-11
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