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lpsolhv wkdw wkh zrunhu*v pdujlqdo uhqw lv }hur li dqg rqo| li { @ v +revhuyh wkdw h 3 li dqg rqo| li
{ +v ,,1
Wkh wklug ghulydwlyhv ri y iru wkdw h{dpsoh/ y{5 +{> , @ 7 6 dqg y{5 +{> , @ 5 6 ^9 4 +v
{,5`/ duh srvlwlyh dorqj {3 / zklfk lpsolhv dvvxpswlrq D41 Pruhryhu/ dvvxpswlrq D5 lv hdvlo| vdwlvhg
s
dqg dvvxpswlrq D6 lv vdwlvhg iru 4 . 51
e
a jlyhv
Vlqfh y{ +{> , @ 54 h+{> ,/ wkh glvfuhwh srrolqj frqglwlrq y{ +{> , @ y{ +{> ,
a @ *+> {, @ ++v {,4 4 ,4 =
Wkxv/ wkh X 0vkdshg sduw fkdudfwhul}hg e| Wkhruhp 6 +ll, lv rqh ri wkh urrwv ri wkh iroorzlqj wklug ghjuhh
sro|qrpldo=63
4
4
5
. 4 . 4 | 5 . 5 4 | 5 . 7 | 6 @ 3
7
5
5
zkhuh | @ v {1
UHIHUHQFHV
DUDXMR/ D1 DQG K1 PRUHLUD +4<<<,= _Dgyhuvh Vhohfwlrq Sureohpv zlwkrxw wkh Vshqfh Pluuohhv
Frqglwlrq/% 44iL/ Lqvwlwxwh ri Sxuh dqg Dssolhg Pdwkhpdwlfv +LPSD,1
DUDXMR/ D1 DQG K1 PRUHLUD +5334,= _Qrq0Prqrwrqh Lqvxudqfh Frqwudfwv dqg wkhlu Hpslulfdo Frq0
vhtxhqfhv/% 44iL/ LPSD1
DUPVWURQJ/ P1 +4<<9,=
_Pxowlsurgxfw Qrqolqhdu Sulflqj/% ,UL?L4i|hU@/ 97/ 840:81
DUURZ/ N1 M1 +4<;9,= _Djhqf| dqg wkh Pdunhw/% O@?_MLL! Lu @|i4@|U@* ,UL?L4Ut/ Yro1 LLL/ hg1
e| N1 M1 Duurz dqg P1 G1 Lqwulooljdwru/ Dpvwhugdp= Qruwk0Kroodqg,/ 44;7044<81
DWKH\/ V1 +5334,= _Vlqjoh Furvvlqj Surshuwlhv dqg wkh H{lvwhqfh ri Sxuh Vwudwhj| Htxloleuld lq Jdphv
ri Lqfrpsohwh Lqirupdwlrq/% ,UL?L4i|hU@/ 9</ ;940;;<1
ELOOLQJVOH\/ S1 +4<;9,= hLM@M*|) @?_ i@thi1 Qhz \run= Mrkq Zlooh| ) Vrqv1
FDYDOOR/ D1/ M1 KHFNPDQ DQG M1 M1 KVHH +4<<;,= _Wkh JHG lv d Pl{hg Vljqdo/% 44iL/ Xqlyhuvlw|
ri Fklfdjr1
FKDVVDJQRQ/ D1 DQG S10D1 FKLDSSRUL +4<<:,= _Lqvxudqfh Xqghu Prudo Kd}dug dqg Dgyhuvh Vhohf0
wlrq= Wkh Fdvh ri Sxuh Frpshwlwlrq/% 44iL/ GHOWD1
f
Wkh prqrwrqlflw| frqglwlrq holplqdwhv wkh rwkhu wzr urrwv1
e2
FKLDSSRUL/ S10D1 DQG E1 VDODQLH +5333,= _Whvwlqj iru Dv|pphwulf Lqirupdwlrq lq Lqvxudqfh Pdu0
nhwv/% aLh?@* Lu L*|U@* ,UL?L4)/ 43;/ 890:;1
HGOLQ/ D1 DQG F1 VKDQQRQ +4<<;d,= _Vwulfw Prqrwrqlflw| lq Frpsdudwlyh Vwdwlfv/% aLh?@* Lu ,UL
?L4U AiLh)/ ;4/ 534054<1
HGOLQ/ D1 DQG F1 VKDQQRQ +4<<;e,= _Vwulfw Vlqjoh Furvvlqj dqg wkh Vwulfw Vshqfh0Pluuohhv Frqglwlrq=
D Frpphqw rq Prqrwrqh Frpsdudwlyh Vwdwlfv/% ,UL?L4i|hU@/ 99/ 474:047581
IXGHQEHUJ/ G1 DQG M1 WLUROH +4<<4,= B@4i AiLh)1 Fdpeulgjh= PLW Suhvv1
JUHHQ/ M1 DQG M1 M1 ODIIRQW +4<;:,= _Olplwhg Frppxqlfdwlrq dqg Lqfhqwlyh Frpsdwlelolw|/% lq
W?uLh4@|L?c W?Ui?|it @?_ ,UL?L4U iU@?t4tc ,tt@)t ? OL?Lh Lu wiL?_ OhU3/
Xql0
yhuvlw| ri Plqqhvrwd Suhvv/ Plqqhdsrolv/ 63;065<1
JXHVQHULH/ U1 +4<<;,= L?|hM|L? |L |i hi AiLh) Lu A@ @|L?1 Hfrqrphwulf Vrflhw| Prqr0
judskv/ Fdpeulgjh Xqlyhuvlw| Suhvv1
JXHVQHULH/ U1 DQG M1 M1 ODIIRQW +4<;7,= _D Frpsohwh Vroxwlrq wr d Fodvv ri Sulqflsdo0Djhqw
Sureohpv zlwk dq Dssolfdwlrq wr wkh Frqwuro ri d Vhoi0Pdqdjhg Ilup/% aLh?@* Lu M*U ,UL?L4Ut/
58/ 65<069<1
KHFNPDQ/ M1 KVHH DQG \1 UXELQVWHLQ +5334,= _Wkh Lpsruwdqfh ri Qrqfrjqlwlyh Vnloov= Ohvvrqv
iurp wkh JHG Whvwlqj Surjudp/% , @Tiht @?_ hLUii_?}t/ <4 +5,/ 478047<1
MXOOLHQ/ E1 +4<<:,= _Sduwlflsdwlrq Frqvwudlqwv lq Dgyhuvh Vhohfwlrq Prghov/% aLh?@* Lu ,UL?L4U
AiLh)/ 5333/ <6/ 407:1
NDKQ/ F1 P1 DQG M1 VFKHLQNPDQ +4<;8,= _Rswlpdo Hpsor|phqw Frqwudfwv zlwk Edqnuxswf| Frq0
vwudlqwv/% aLh?@* Lu ,UL?L4U AiLh)/ 68/ 67606981
ODIIRQW/ M1 M1 DQG M1 WLUROH +4<<6,=
AiLh) Lu W?Ui?|it ? hLUhi4i?| @?_ +i}*@|L?1
Fdpeulgjh= PLW Suhvv1
ODIIRQW/ M1 M1/ H1 PDVNLQ DQG M1 F1 URFKHW +4<;:,= _Rswlpdo Qrqolqhdu Sulflqj zlwk Wzr
Fkdudfwhulvwlfv/% lq W?uLh4@|L?c
W?Ui?|it @?_ ,UL?L4U iU@?t4tc ,tt@)t ? OL?Lh Lu
e
wiL?_ OhU3/ Xqlyhuvlw| ri Plqqhvrwd Suhvv/ Plqqhdsrolv/ 58905991
OHZLV/ W1 DQG G1 VDSSLQJWRQ +4<;<,= _Frxqwhuydlolqj Lqfhqwlyhv lq Djhqf| Sureohpv/% aLh?@* Lu
,UL?L4U AiLh)/ 99/ 56;05961
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PDJJL/ J1 DQG D1 URGULJXH]0FODUH +4<<8,= _Rq Frxqwhuydlolqj Lqfhqwlyhv/% aLh?@* Lu ,UL
?L4U AiLh)/ 99/ 56;05961
PDVNLQ/ H1 DQG M1 ULOH\ +4<;7,= _Prqrsro| zlwk Lqfrpsohwh Lqirupdwlrq/% +@?_ aLh?@* Lu ,UL
?L4Ut/ 48/ 4:404<91
PfDIHH/ U1 S1 DQG M1 PfPLOODQ +4<;;,= _Pxowlglphqvlrqdo Lqfhqwlyh Frpsdwlelolw| dqg Phfkdqlvp
Ghvljq/% aLh?@* Lu ,UL?L4U AiLh)/ 79/ 66806871
PDWWKHZV/ V1 DQG M1 PRRUH +4<;:,= _Prqrsro| Surylvlrq ri Txdolw| dqg Zduudqwlhv= dq H{sor0
udwlrq lq wkh Wkhru| ri Pxowlglphqvlrqdo Vfuhhqlqj/% ,UL?L4i|hU@/ 88/ 774079:1
PLOJURP/ S1 DQG L1 VKDQQRQ +4<<7,= _Prqrwrqh Frpsdudwlyh Vwdwlfv/% ,UL?L4i|hU@/ 95/ 48:04;31
PLOJURP/ S1 DQG L1 VHJDO +5333,= _Hqyhorsh Wkhruhpv iru Duelwudu| Fkrlfh Vhwv/% 44iL/ Vwdqirug
Xqlyhuvlw|1
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Lu
,UL?L4Ut 5|_it/ 6;/ 4:8053;1
PLUUOHHV/ M1 D1 +4<:9,= _Rswlpdo Wd{ Wkhru|= D V|qwkhvlv/% aLh?@* Lu M*U ,UL?L4Ut/ 9/ 65:0
68;1
PLUUOHHV/ M1 D1 +4<;9,= _Wkh Wkhru| ri Rswlpdo Wd{dwlrq/% O@?_MLL! Lu @|i4@|U@* ,UL?L4Ut/
Yro1 LLL/ hg1 e| N1 M1 Duurz dqg P1 G1 Lqwulooljdwru/ Dpvwhugdp= Qruwk0Kroodqg/ 44<:0457<1
PXVVD/ P1 DQG V1 URVHQ +4<:;,= _Prqrsro| dqg Surgxfw Txdolw|/% aLh?@* Lu ,UL?L4U AiLh)/
4;/ 634064:1
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dqg Dgyhuvh Vhohfwlrq/% ,UL?L4U AiLh)/ 4/ 656066;1
ee
URFKHW/ M10F1 +4<;8,= _Wkh Wd{dwlrq Sulqflsoh dqg wkh Pxowl0Wlph Kdplowrq0Mdfrel Htxdwlrq/% aLh
?@* Lu @|i4@|U@* ,UL?L4Ut/ 47/ 446045;1
URFKHW/ M10F1 +4<;:,= _D Qhfhvvdu| dqg Vxflhqw Frqglwlrq iru Udwlrqdol}delolw| lq d Txdvl0Olqhdu
Frqwh{w/% aLh?@* Lu @|i4@|U@* ,UL?L4Ut/ 49/ 4<405331
URFKHW/ M10F1 DQG S1 FKRQH +4<<;,= _Lurqlqj/ Vzhhslqj dqg Pxowlglphqvlrqdo Vfuhhqlqj/% ,UL?L
4i|hU@/ 99/ :;60;591
URFKHW/ M10F1 DQG O1 VWROH +5333,= _Wkh Hfrqrplfv ri Pxowlglphqvlrqdo Vfuhhqlqj/% 44iL/ ;wk
Zruog Frqjuhvv dw Vhdwwoh1
URWKVFKLOG/ DQG M1 VWLJOLW] +4<:9,= _Htxloleulxp lq Lqvxudqfh Pdunhwv= Dq Hvvd| rq wkh Hfr0
qrplfv ri Lpshuihfw Lqirupdwlrq/% "@h|ih*) aLh?@* Lu ,UL?L4Ut/ <3/ 95<07<1
UXGLQ/ Z1 +4<:7,= +i@* @?_ L4T*i
?@*)tt1
PfJudz0Kloo/ Lqf1/ 5qg hg1
VSHQFH/ P1 +4<:7,= _Frpshwlwlyh dqg Rswlpdo Uhvsrqvhv wr Vljqdov1 Dq Dqdo|vlv ri Hflhqf| dqg
Glvwulexwlrq/% aLh?@* Lu ,UL?L4U AiLh)/ :/ 5<906651
VWROH/ O1 +4<<4,= _Phfkdqlvp Ghvljq xqghu Frpprq Djhqf|/% 44iL/ Xqlyhuvlw| ri Fklfdjr/ JVE1
Moral hazard with adverse selection
Moral hazard with adverse selection
0.5
0.5
0.45
0.45
0.4
0.4
0.35
0.35
0.3
0.3
0.25
x
x
x1
xSB
0.25
0.2
0.2
0.15
0.15
0.1
0.1
0.05
0.05
0
0
0.1
0.2
0.3
0.4
0.5
θ
0.6
0.7
0.8
0.9
0
0.2
1
x1
xSB
0.3
ILJXUHV 414 DQG 415
eD
0.4
0.5
0.6
θ
0.7
0.8
0.9
1
Labor Contract
Labor Contract
1.8
1.5
1.7
1.4
1.6
1.5
1.3
1.4
x
x1
x
x
1
1.3
1.2
1.2
xsb
1.1
1.1
xsb
x0
1
1
x
0.9
0.8
0
1
1.05
1.1
1.15
1.2
1.25
θ
1.3
1.35
1.4
1.45
0.9
1.5
1
1.05
1.1
1.15
1.2
1.25
θ
1.3
1.35
1.4
1.45
1.5
The expected relaxed and second best profits
Labor Contract
1.5
0.58
1.45
1.4
π
1
0.575
1.35
x
profit
1.3
1.25
0.57
1.2
x
1.15
0
0.565
1.1
1.05
x
πSB
sb
x1
0.9
1
1.05
1.1
1.15
1.2
1.25
θ
1.3
1.35
1.4
1.45
1.5
ILJXUHV 514 517
eS
1
1.1
1.2
α
1.3
1.4
1.5
1.6