Open AccessUnraveling in a repeated moral hazard model with multiple agents
Author(s) -
Chandrasekher Madhav
Publication year - 2015
Publication title -
theoretical economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.404
H-Index - 32
eISSN - 1555-7561
pISSN - 1933-6837
DOI - 10.3982/te833
Subject(s) - collusion , principal (computer security) , moral hazard , mathematical economics , stochastic game , economics , discounting , economic rent , microeconomics , subgame perfect equilibrium , repeated game , bidding , class (philosophy) , nash equilibrium , computer science , game theory , incentive , finance , artificial intelligence , operating system
This paper studies an infinite‐horizon repeated moral hazard problem where a single principal employs several agents. We assume that the principal cannot observe the agents' effort choices; however, agents can observe each other and can be contractually required to make observation reports to the principal. Observation reports, if truthful, can serve as a monitoring instrument to discipline the agents. However, reports are cheap talk so that it is also possible for agents to collude, i.e., where they shirk, earn rents, and report otherwise to the principal. The main result of the paper constructs a class of collusion‐proof contracts with two properties. First, equilibrium payoffs to both the principal and the agents approach their first‐best benchmarks as the discount factor tends to unity. These payoff bounds apply to all subgame perfect equilibria in the game induced by the contract. Second, while equilibria themselves depend on the discount factor, the contract that induces these equilibria is independent of the discount factor.