Economics, Econometrics and Finance
6 years ago

Principal's Power Play: Eliminating Second Chances to Curb Moral Hazard

SSRN Electronic Journal
Hunting with Two Bullets: Moral Hazard with a Second Chance
Paulo Fagandini

Paper Summary

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The article explores a situation where someone can try to improve a bad outcome before it's noticed. Both the person in charge and the one doing the work like having this option if it's not too costly. Surprisingly, making the effort cheaper doesn't always mean less effort will be done. If the person in charge can set tight deadlines to prevent the extra chance, they will do so when it's expensive to manage the situation. Also, if the person in charge might get in trouble for allowing the extra chance, they will avoid contracts that only reward effort on that extra chance.