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Journal Article

Moral Hazard in Teams

Bengt Holmstrom
The Bell Journal of Economics
Vol. 13, No. 2 (Autumn, 1982), pp. 324-340
Published by: RAND Corporation
DOI: 10.2307/3003457
Stable URL: http://www.jstor.org/stable/3003457
Page Count: 17
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Moral Hazard in Teams
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Abstract

This article studies moral hazard with many agents. The focus is on two features that are novel in a multiagent setting: free riding and competition. The free-rider problem implies a new role for the principal: administering incentive schemes that do not balance the budget. This new role is essential for controlling incentives and suggests that firms in which ownership and labor are partly separated will have an advantage over partnerships in which output is distributed among agents. A new characterization of informative (hence valuable) monitoring is derived and applied to analyze the value of relative performance evaluation. It is shown that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally. Competition per se is worthless. The role of aggregate measures in relative performance evaluation is also explored, and the implications for investment rules are discussed.

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