‘Moral Hazard, Quantity Competition and Why Consumers Should Care About Firms’ Agency Problems’

This week’s CCP seminar takes place on Friday 1st November with David Deller (CCP), who has recently joined the Centre as a Research Associate, presenting his research on ‘Moral Hazard, Quantity Competition and Why Consumers Should Care About Firms’ Agency Problems‘. An abstract for his seminar can be found below.

Abstract

In textbook models of competition, firms are treated as ‘black-box’ profit functions. The paper opens up this ‘black-box’ to highlight the conditions when a standard moral hazard problem within firms can have a significant downward impact on the expected outcome of quantity competition. In a parameterised model, it is shown that, as a market grows “large”, the equilibrium expected output of firms suffering from moral hazard problems is significantly lower than the expected output when firms without moral hazard problems collude. Furthermore, it is shown that firms may not undertake a costly investment in monitoring despite it being welfare enhancing. The negative impact of moral hazard on market outcomes gives a justification for consumers, and not just shareholders, to care about how firms resolve their internal agency problems. Also, time permitting, a discussion of the potential for product market collusion to be achieved via collusion in the incentive contracts offered by firms to their workers will be given.

The seminar takes place from 13:00-14:00 in the Thomas Paine Study Centre, Room 1.4.

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