Moral hazard in welfare economics: on the advantage of Planner's advices to manage employees' actions

TL;DR

This paper explores how introducing an exogenous Planner in welfare economics can improve management of moral hazard issues among agents, leading to better Pareto optimal outcomes and potentially benefiting the Principal.

Contribution

It provides a theoretical framework for incorporating a Planner into contract theory, ensuring Pareto optima and deriving optimal remunerations, with a linear-quadratic model illustration.

Findings

Pareto optima can be achieved via scalarization methods.

The Planner's intervention can lead to better outcomes for the Principal.

Necessary and sufficient conditions for Pareto optima to be Nash equilibria are established.

Abstract

In this paper, we study moral hazard problems in contract theory by adding an exogenous Planner to manage the actions of Agents hired by a Principal. We provide conditions ensuring that Pareto optima exist for the Agents using the scalarization method associated with the multi-objective optimization problem and we solve the problem of the Principal by finding optimal remunerations given to the Agents. We illustrate our study with a linear-quadratic model by comparing the results obtained when we add a Planner in the Principal/multi-Agents problem with the results obtained in the classical second-best case. More particularly in this example, we give necessary and sufficient conditions ensuring that Pareto optima are Nash equilibria and we prove that the Principal takes the benefit of the action of the Planner in some cases