Managing Moral Hazard Impact in Decision Making Process

Abstract

Everyday people make several decisions. The key feature for selecting the best decision is that people possess sufficient information about the outcomes of possible choices. Nevertheless, the investigation and analysis of all outcomes of all possible choices is a complex and expensive task. Accordingly, people lack all appropriate information for making a decision. This paper addresses model in which an agent has to make a decides on behalf of the manager. An important feature in the model is partial and asymmetric information. Generally, the model is separated into two parts. The first part deals with the situation where the manager is better informed than the agent, and the second part, which is the main focus of this study, deals with the situation where the agent is better informed than the manager. Thus, the agent makes a decision about a project. Frequently, an agent does not behave in the interest of the manager. This paper analyzes how the manager makes use of a retention contract to dismiss or to retain the agent.