Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/102202
Authors: 
Dittrich, Marcus
Städter, Silvio
Year of Publication: 
2014
Series/Report no.: 
CESifo Working Paper 4920
Abstract: 
This paper analyses bargaining over an incentive compatible contract in a moral hazard framework. We introduce the Kalai-Smorodinsky bargaining solution and compare the outcome with the commonly applied Nash solution. Whether worker's effort is higher in the Nash or the Kalai-Smorodinsky solution depends on the agents. bargaining power. If agents have equal bargaining power, the contract in the Kalai-Smorodinsky solution yields a more efficient outcome and induces more effort. The social planner can mitigate inefficiencies arising in both bargaining solutions from the moral hazard problem and even achieve the first-best outcome by allocating the agents' bargaining power. If raising the worker's bargaining power is necessary to achieve the first-best solution, this increase must be higher in the Nash solution than in the Kalai-Smorodinsky solution.
Subjects: 
incentive contracts
moral hazard
Nash bargaining solution
Kalai-Smorodinsky solution
bargaining power
JEL: 
C71
D82
J41
Document Type: 
Working Paper

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