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October 2017, 13(4): 1815-1840. doi: 10.3934/jimo.2017020
An uncertain wage contract model for risk-averse worker under bilateral moral hazard
Xiulan Wang , Yanfei Lan , and Wansheng Tang
Institute of Systems Engineering, Tianjin University, Tianjin 300072, China
* Corresponding author: Yanfei Lan, Email: lanyf@tju.edu.cn
Received February 2016 Revised October 2016 Published December 2016
Figure(5) / Table(1)
This paper investigates a wage mechanism design problem faced by a risk neutral firm (he) who employs a risk averse worker (she) to sell products for him. The effort levels of both the firm and the worker are unobservable to each other, which results in bilateral moral hazard. The firm offers a wage contract menu to the worker with the objective of maximizing his expected profit. The results show that the firm will provide the same wage contract to the worker when the worker's effort is observable regardless of the market condition being full or private information. The optimal wage contract is related to the worker's risk averse level when the bilateral moral hazard exists. The information values of the worker's effort and the market condition are studied, respectively. The results show that the firm benefits from the worker's observable effort under full information and only when the sales uncertainty is sufficiently low, can the firm profit from that under private information. Moreover, only if the cost coefficient of the firm's effort is sufficiently high, the firm can benefit from full information in the scenario when the worker's effort is unobservable.
Keywords: Bilateral moral hazard, private information, uncertain variable, wage contract.
Mathematics Subject Classification: Primary: 91B40, 91A40; Secondary: 91A80.
Citation: Xiulan Wang, Yanfei Lan, Wansheng Tang. An uncertain wage contract model for risk-averse worker under bilateral moral hazard. Journal of Industrial & Management Optimization, 2017, 13 (4) : 1815-1840. doi: 10.3934/jimo.2017020
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Figure 1. Optimal bonus coefficient of the wage
Figure 2. Optimal effort of the firm
Figure 3. Optimal effort of the worker
Figure 4. Impact of the worker's risk adverse level on VE1 and VE2
Figure 5. Impact of the worker's risk adverse level on VM1 and VM2
Table 1. The four information cases
$X$ known $X$ unknown
The worker's observable effort Case $\rm{OF}$ Case $\rm{OP}$
The worker's unobservable effort Case $\rm{UF}$ Case $\rm{UP}$
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