An Uncertain Wage Contract Model with Adverse Selection and Moral Hazard

This paper considers a wage contract design problem faced by an employer (he) who employs an employee (she) to work for him in labor market. Since the employee's ability that affects the productivity is her private information and cannot be observed by the employer, it can be characterized as a...

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Bibliographic Details
Published in:Journal of Applied Mathematics 2014-01, Vol.2014 (2014), p.123-131-214
Main Authors: Wang, Xiulan, Wang, Jiao, Lan, Yanfei
Format: Article
Language:English
Subjects:
Adverse selection
Contracts
Design engineering
Economic models
Equivalence
Hazards
Incentives
Labor relations
Mathematical models
Moral hazard
Optimization
Utilities
Wages
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Summary:This paper considers a wage contract design problem faced by an employer (he) who employs an employee (she) to work for him in labor market. Since the employee's ability that affects the productivity is her private information and cannot be observed by the employer, it can be characterized as an uncertain variable. Moreover, the employee's effort is unobservable to the employer, and the employee can select her effort level to maximize her utility. Thus, an uncertain wage contract model with adverse selection and moral hazard is established to maximize the employer's expected profit. And the model analysis mainly focuses on the equivalent form of the proposed wage contract model and the optimal solution to this form. The optimal solution indicates that both the employee's effort level and the wage increase with the employee's ability. Lastly, a numerical example is given to illustrate the effectiveness of the proposed model.
ISSN:1110-757X
1687-0042
DOI:10.1155/2014/282867