Moral hazard and sorting in a market for partnerships

Ayca Kaya, Galina Vereshchagina

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

We examine how equilibrium sorting patterns in a matching market for partnerships are impacted by the presence of bilateral moral hazard in a repeated production setting. We find that this impact depends on how the cost of moral hazard manifests itself—whether efficient effort is not feasible or desirable from the beginning, or whether inefficient effort is resorted to only as a punishment equilibrium. Which of these is the case depends on both the details of the technology and the contractual environment. In the former case, the presence of moral hazard moves the market away from positive sorting. In the latter case, whether moral hazard favors positive or negative sorting depends on how the power of incentives needed to implement effort varies with the observable types of the agents.

Original languageEnglish (US)
Pages (from-to)73-121
Number of pages49
JournalEconomic Theory
Volume60
Issue number1
DOIs
StatePublished - Sep 13 2015

Keywords

  • Assortative matching
  • Moral hazard
  • Partnerships

ASJC Scopus subject areas

  • Economics and Econometrics

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