Moral Hazard and Least-Cost Contracts: Impact of Changes in Conditional Probabilities

Moral hazard often called hidden action arises when one party a principal hires another party an agent who undertakes unobservable effort The agents effort is stochastically related to the outcomes or profits of the principal Because the effort is not observable or verifiable the agent can only be paid a wage contingent upon the observable variable such as whether a sale occurred or not If a profi