Moral Hazard and Observability.

Holmstrom, B. (1979). Moral Hazard and Observability. Bell Journal of Economics, 10(1), 74-91.

Type

Journal article

Intellectual base

Primary research

Year

1979

DOI

10.2307/3003320

Link

https://doi.org/10.2307/3003320

Cited from

economics_finance, military_strategic_studies, political_science

Cited by

7 citations across 7 artifacts.

Each citation links to the sentence it supports in the citing article.

Primes

• Accountability
  • Collective accountability is humbling (institutions are complex; no one person controls outcomes) but, as Holmström (1979) shows in his foundational analysis of moral hazard under unobservable effort, can diffuse responsibility into no one being accountable

    This sourceFoundational moral-hazard model: when an agent's action is only partially observable, optimal contracts condition pay on every informative signal of effort

• Agency Problem
  • … goals or pursuit of perks), diverging risk preferences (the principal as residual claimant may be less risk-averse than the agent who depends on wage income), and information asymmetries (moral hazard: the agent's action is hidden and unobservable; adverse selection: the agent's type or ability is hidden and unknown)

    This sourceFoundational moral-hazard model: the optimal contract conditions pay on every informative signal of effort and trades risk-sharing against incentive provision for a risk-averse agent (the informativeness principle / second-best). SUPPORTS the four claims it is cited on: the moral-hazard/adverse-selection sources of misalignment, Holmström's optimal-contract theorem, the risk-sharing-vs-incentives second-best trade-off, and the 'not always resolvable by pay-for-performance' point.

• Authority Delegation Under Uncertainty
  • A core function of Authority Delegation Under Uncertainty is to distinguish between two different types of delegation problems. Specified-Contingency Delegation assumes the delegator has identified possible cases and can define criteria: "If inventory falls below X, order Y" — the contractible-actions regime Holmström (1979) used as the baseline against which moral-hazard problems are defined.

    This sourceFoundational moral-hazard model: optimal contracts condition pay on every informative (contractible) signal of effort; defines the contractible-actions baseline that specified-contingency delegation assumes

• Incentive Compatibility
  • … executive compensation schemes, supplier contracts, and performance-based pay are structured so the agent's utility-maximizing action aligns with the principal's desired action — the central design problem of Jensen and Meckling (1976) and the principal-agent literature, with formal foundations in Holmström (1979)

    This sourceFoundational moral-hazard model: when an agent's action is partially observable, optimal contracts condition pay on every contractible signal of effort. Defines the contractible-actions baseline that specified-contingency delegation assumes — and against which genuinely unknown contingencies break.

• Moral Hazard
  • The formalization by Arrow (1963) , Pauly (1968) , Mirrlees (1971–75) , and Holmström (1979)

    This sourceFoundational moral-hazard model: when an agent's action is partially observable, optimal contracts condition pay on every contractible signal of effort. Defines the contractible-actions baseline that specified-contingency delegation assumes — and against which genuinely unknown contingencies break.

• Risk Pooling
  • Too much incentive structure (high deductibles, intrusive monitoring) undermines the pooling benefit; too little allows moral hazard to erode the pool, a principal–agent trade-off Holmström (1979) characterized via the informativeness principle for optimal contracts.

    This sourceFoundational moral-hazard model: when an agent's action is partially observable, optimal contracts condition pay on every contractible signal of effort. Defines the contractible-actions baseline that specified-contingency delegation assumes — and against which genuinely unknown contingencies break.

Mechanisms

• Clawback or Reversion Clause
  • The subsidy stayed contingent on the outcome it was bought for, which is what keeps skin in the game and blunts the moral hazard of a one-way payment.

Verification

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Links previously used in the corpus

Before the registry existed this work was also linked 1 other way.

• https://www.jstor.org/stable/3003320 ×1

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