ABSTRACT
Chapter 11 discusses moral hazard and the design of incentive mechanisms. The source of moral hazard (corruption) is related to the information asymmetry about the actions of people involved. We analyze the ways in which the optimal incentive mechanism balances insurances and incentives, the main element in determining the strength of incentives, and the difficulty of incentivizing multiple tasks. We rely on the “corruption equation” to analyze the causes of official corruption and means to resolve it.
