Exogenous Targeting Instruments as a Solution to the Group Moral Hazard
John Spraggon
McMaster University
Hamilton, Ontario, Canada
L8S 4M4
September 1997
Abstract
Existing experimental evidence suggests that exogenous
targeting instruments are unable to solve the group moral hazard problem.
In contrast, this paper shows that exogenous targeting instruments which
mitigate the group moral hazard problem can be designed. A distinction
is drawn between instruments which result in discontinuities in individual
payoffs and those which do not. The results suggest that the continuous
contracts are consistently able to enforce a standard. It is shown
that this result is robust to uncertainty as well as experience.
However, none of the contracts insures compliance at the individual level,
and as a result hefty fines may be accrued by individuals even when they
are in compliance. (JEL H21, C92)
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Last updated: Nov 4, 1997