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Multitasking, Multidimensional Screening, and Moral Hazard with Risk Neutral Agents *
Author(s) -
BASOV SUREN,
DANILKINA SVETLANA
Publication year - 2010
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.2010.00662.x
Subject(s) - risk neutral , human multitasking , adverse selection , moral hazard , principal (computer security) , private information retrieval , welfare , compensation (psychology) , microeconomics , business , measure (data warehouse) , principal–agent problem , risk analysis (engineering) , actuarial science , computer science , economics , incentive , computer security , finance , data mining , social psychology , psychology , market economy , corporate governance , cognitive psychology
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 and possesses private information about her cost of effort. We show that when the number of effort dimensions exceeds the number of performance measures observed by the principal hidden action leads to an additional welfare loss compared with pure adverse selection even if both parties are risk neutral and the production technology is independent of the agent's type. The result implies that if effort has many dimensions it is beneficial to the principal to base employees’ compensation on many performance measures rather than on a single ‘bottom‐line’ measure (e.g. their contribution to the company's profits).