Effects of Wealth and Its Distribution on the Moral Hazard Problem

Abstract

We analyze how the wealth of an agent and its distribution affect the profit of the principal by considering the simple moral hazard model developed by Baker and Hall (2004). The first result is that a rich agent is preferred over a poor one, which differs from the result of Thiele and Wambach (1999). The distinction comes from our model has only the effect of a change in risk aversion because of an increase in wealth. The second result is that the profit function of the principal is concave in wealth, which presents an implication that the principal prefers a group of agents with low wealth inequality over one with high wealth inequality.