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Research Details
Initiative
Abstract
We consider a standard moral hazard problem with the sole addition that the agent can avoid initiative by choosing an alternative project which makes extreme outcomes less likely. A principal who wishes the agent to exert initiative must thus both dissuade the safer project and provide incentives for effort. We provide a comprehensive analysis of this problem. Two major economic insights arise. First, there will be a general tendency for incentives inducing any given effort to be flatter at low outcomes and steeper at high outcomes, giving a new explanation to option-like incentive schemes. Second, in many settings of interest, there will be a tendency for the principal, facing this extra constraint, to either distort effort upwards compared to the pure moral-hazard problem or to give up and cease to ask for initiative. Effectively, go big, or go home.
Type
Working Paper
Author(s)
Hector Chade, Jeroen Swinkels
Date Published
2024
Citations
Chade, Hector, and Jeroen Swinkels. 2024. Initiative.
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