Optimal Team Contract under Moral Hazard

The design of the team contract under moral hazard is discussed in this paper. Holmstrom argues that budget-breaking should be efficient in risk neutral team. However,Eswaran and Kotwal point out that Holmstrom ignores the potential hazard of the principal’s moral hazard by budget-breaking. But this paper proves that there exists no principal’s moral hazard in the model of Holmstrom, and gives a more general discussion of the case that the risk-adverse team obtains the result of Rasmusen and explores other situations that Rasmusen did not study.