Resolving Double Moral Hazard Problems with Buyout Agreements

摘要: We consider a double moral hazard problem in which the efforts of two parties, e.g., principal who initially owns an enterprise and risk-averse agent enterprise, are not verifiable. The realized value enterprise's random profit stream is also unverifiable. There no third party to break "balanced budget" requirement. Nevertheless, can be resolved completely costlessly when principal, observe agent's actions, has option requiring purchase at prenegotiated price.