Some Notes on Moral Hazard

Up until this point, we have been concerned mainly with the problem of private information on the part of the agent, information that was economically valuable for the principal in undertaking some decision. In this section, we will be worried about hidden action on the part of the agent. Problems here center on setting the right incentive scheme for the agent to choose an action consistent with the principal’s objectives. It will turn out that general conclusions are di¢ cult to draw for this class of problems. These notes will highlight some simple and prominent special models as well as applications.