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Divergence of Social and Private Benefit in Principal-Agent Problems
In principal-agent relationships characterized by moral hazard, a conflict arises between the collective benefit of the agent's actions and the agent's personal benefit. The total or 'social' benefit is shared between the principal and the agent, but the agent alone bears the cost of their effort. Because the agent's private benefit is only a fraction of the total benefit created, they will choose a level of care or effort that is lower than the amount that would be optimal for both parties combined.
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The Economy 2.0 Microeconomics @ CORE Econ
Ch.10 Market successes and failures: The societal effects of private decisions - The Economy 2.0 Microeconomics @ CORE Econ
Introduction to Microeconomics Course
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Learn After
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