TRACKS: Bailouts and Unwanted Coordination

Abstract

This paper demonstrates that ex post bailouts prompted by a noncontractible signal of output can lead to ex ante tacit collusion. The possibility of being bailed out whenever they fail can decrease the incentives of agents to do a good job in the first place.

Get full access to this article

View all access options for this article.

References

Arya

Glover

. 1995. “A Simple Forecasting Mechanism for Moral Hazard Settings”. Journal of Economic Theory, 66: 507–521.

Cooper

Ross

. 1985. “Product Warranties and Double Moral Hazard”. Rand Journal of Economics, 15: 103–113.

Demski

Sappington

. 1984. “Optimal Incentive Contracts with Multiple Agents”. Journal of Economic Theory, 33: 152–171.

Demski

Sappington

. 1991. “Resolving Double Moral Hazard Problems Without Buyout Agreements”. Rand Journal of Economics, 22: 232–240.

Demski

Sappington

. 1993. “Sourcing with Unverifiable Information”. Journal of Accounting Research, 31: 1–20.

Kreps

1990. A Course in Microeconomic Theory. Princeton, NJ: Princeton University Press.

Laffont

Martimort

. 2002. The Theory of Incentives. Princeton, NJ: Princeton University Press.

Moore

Turnbull

. 1988. “Stopping Agents from ‘Cheating.’” Journal of Economic Theory, 46: 355–372.

Mookherjee

1984. “Optimal Incentive Schemes with Many Agents”. Review of Economic Studies, 51: 433–446.