Moral hazard and incentives

Abstract

This thesis focuses on the probable influence of minimum requirement terms on principal-agent problems with information asymmetry. They are indeed common in real-world situations and affect the power of incentive schemes that the principal suggests to agents ex ante. In particular, they are significant to the cases in which the final output is dependent only upon the best one; high minimum requirement levels could restrict the power of incentive schemes to be asymmetric. What matters more is the fact that if they are set excessively high, a project that would be profitable may be abandoned resulting in lowering social welfare.