Your browser does not support the PubReader view.
Go to this page to see a list of supporting browsers.
Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 30, No. 4, pp.487-502
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2017
Received 01 Nov 2017 Revised 15 Nov 2017 Accepted 17 Nov 2017

Effects of Wealth and Its Distribution on the Moral Hazard Problem

Jin Yong Jung
Jin Yong Jung, Visiting Researcher, BK21 Education Research Program, Seoul National University, South Korea econdragon@gmail.com

JEL Classification: D31, D82, D86, J33

Abstract

We analyze how the wealth of an agent and its distribution affect the profit of the principal by considering the simple moral hazard model developed by Baker and Hall (2004). The first result is that a rich agent is preferred over a poor one, which differs from the result of Thiele and Wambach (1999). The distinction comes from our model has only the effect of a change in risk aversion because of an increase in wealth. The second result is that the profit function of the principal is concave in wealth, which presents an implication that the principal prefers a group of agents with low wealth inequality over one with high wealth inequality.

Keywords:

Principal–agent problem, Wealth effect, Wealth distribution, Exponential utility, Agency cost

Acknowledgments

This research was supported by the BK21Plus Program (Future-oriented innovative brain raising type, 21B20130000013) funded by the Ministry of Education (MOE, Korea) and National Research Foundation of Korea (NRF).

References

  • Baker, George P., and Brian J. Hall. “CEO Incentives and Firm Size.” Journal of Labor Economics 22 (No. 4 2004): 767-798. [https://doi.org/10.1086/423154]
  • Chade, Hector, and Virginia N. Vera de Serio. “Wealth Effects and Agency Costs.” Games and Economic Behavior 86 (2014): 1-11. [https://doi.org/10.1016/j.geb.2014.02.012]
  • Cho, Shin. “Agency Costs, Management Stockholding, and Research and Development Expenditures.” Seoul Journal of Economics 5 (No. 2 1992): 127-152.
  • Grossman, Sanford J., and Oliver D. Hart. “An Analysis of the Principal-Agent Problem.” Econometrica 51 (No. 1 1983): 7-45. [https://doi.org/10.2307/1912246]
  • Holmstrom, Bengt, and Paul Milgrom. “Aggregation and Linearity in the Provision of Intertemporal Incentives.” Econometrica 55 (No. 2 1987): 303-328. [https://doi.org/10.2307/1913238]
  • Kim, Son Ku. “Efficiency of an Information System in an Agency Model.” Econometrica 63 (No. 1 1995): 89-102. [https://doi.org/10.2307/2951698]
  • Thiele, Henrik, and Achim Wambach. “Wealth Effects in the Principal Agent Model.” Journal of Economic Theory 89 (No. 2 1999): 247-60. [https://doi.org/10.1006/jeth.1999.2570]