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Moral Hazard, Minimum Wages, and Market Outcomes


We consider the effect of an increase in the minimum feasible payment (driven by a minimum wage, limited liability, social norms or a legal restriction that pay cannot be negative) in markets with performance pay. We build a model in which a principal can adjust both the incentives of agents and the number of agents it employs. While a principal with a fixed number of agents will typically reduce the amount of effort it chooses to implement when the minimum payment increases, a principal that can also adjust its employment level will often instead increase the effort it induces. When embedded in a simple market setting, a typical outcome is that a moderate minimum payment makes all participants in the economy, including agents who keep their job, worse off. On the other hand, a considerable minimum payment, one that makes the issue of employee retention irrelevant, can help agents who keep their jobs.


Working Paper


Jeroen Swinkels, Ohad Kadan

Date Published



Swinkels, Jeroen, and Ohad Kadan. 2010. Moral Hazard, Minimum Wages, and Market Outcomes.


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