Initiative

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.