Can Group Incentives Alleviate Moral Hazard? The Role of Pro-Social Preferences

Item Type Journal paper
Abstract

Incentivizing unobservable effort in risky environments, such as in insurance, credit, and labor markets, is vital as moral hazard may otherwise cause significant welfare losses including the outright failure of markets. Ensuring incentive-compatibility through state-contingent contracts between principal and agent, however, is undesirable for risk-averse agents. We provide a theoretical intuition on how pro-social preferences between agents in a joint liability group con-tract can ensure incentive-compatibility. Two independent large-scale behavioral experiments framed in an insurance context support the hypotheses derived from our theory. In particular, effort decreases when making agents’ payoff less state-dependent, but this effect is mitigated with joint liability in a group scheme where agents are additionally motivated by pro-social concerns. Activating strategic motives slightly increases effort further; particularly in non-anonymous groups with high network strength. The results support existing evidence on joint liability groups and further suggest that even if peer pressure to ensure effort provision is absent, such group policies can improve efficiency when agents are pro-social.

Authors Biener, Christian; Eling, Martin; Landmann, Andreas & Pradhan, Shailee
Projects Biener, Christian; Eling, Martin & Landmann, Andreas (2012) Experimental Studies in Microinsurance Markets [fundamental research project]
Journal or Publication Title European economic review : EER
Language English
Keywords Moral hazard, Group joint liability, Pro-social preferences, Experiment
Subjects business studies
economics
finance
HSG Classification contribution to scientific community
Refereed Yes
Date January 2018
Publisher Elsevier
Place of Publication Amsterdam
Volume 101
Page Range 230-249
ISSN 0014-2921
ISSN-Digital 1873-572X
Publisher DOI 10.1016/j.euroecorev.2017.10.004
Official URL https://www.sciencedirect.com/science/article/pii/...
Depositing User PD Dr. Christian Biener
Date Deposited 09 Mar 2015 13:39
Last Modified 30 Oct 2018 17:19
URI: https://www.alexandria.unisg.ch/publications/239758

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Biener, Christian; Eling, Martin; Landmann, Andreas & Pradhan, Shailee (2018) Can Group Incentives Alleviate Moral Hazard? The Role of Pro-Social Preferences. European economic review : EER, 101 230-249. ISSN 0014-2921

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https://www.alexandria.unisg.ch/id/eprint/239758
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