Journal of Applied Mathematics

An Uncertain Wage Contract Model with Adverse Selection and Moral Hazard

Xiulan Wang, Yanfei Lan, and Jiao Wang

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This paper considers a wage contract design problem faced by an employer (he) who employs an employee (she) to work for him in labor market. Since the employee's ability that affects the productivity is her private information and cannot be observed by the employer, it can be characterized as an uncertain variable. Moreover, the employee's effort is unobservable to the employer, and the employee can select her effort level to maximize her utility. Thus, an uncertain wage contract model with adverse selection and moral hazard is established to maximize the employer's expected profit. And the model analysis mainly focuses on the equivalent form of the proposed wage contract model and the optimal solution to this form. The optimal solution indicates that both the employee's effort level and the wage increase with the employee's ability. Lastly, a numerical example is given to illustrate the effectiveness of the proposed model.

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J. Appl. Math., Volume 2014 (2014), Article ID 282867, 9 pages.

First available in Project Euclid: 2 March 2015

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Wang, Xiulan; Lan, Yanfei; Wang, Jiao. An Uncertain Wage Contract Model with Adverse Selection and Moral Hazard. J. Appl. Math. 2014 (2014), Article ID 282867, 9 pages. doi:10.1155/2014/282867.

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