<P> According to Hart and Holmström (1987), moral hazard models can be subdivided in models with hidden action and models with hidden information . In the former case, after the contract has been signed the agent chooses an action (e.g. an effort level) that cannot be observed by the principal . In the latter case, after the contract has been signed there is a random draw by nature that determines the agent's type (e.g., his valuation for a good or his costs of effort). In the literature, two reasons have been discussed why moral hazard may imply that the first - best solution (i.e., the solution that would be attained under complete information) is not achieved . First, the agent may be risk - averse, so there is a trade - off between providing the agent with incentives and insuring the agent . Second, the agent may be risk - neutral but wealth - constrained, so the agent cannot make a payment to the principal and there is a trade - off between providing incentives and minimizing the agent's limited - liability rent . Among the early contributors to the contract - theoretic literature on moral hazard were Oliver Hart and Sanford J. Grossman . In the meantime, the moral hazard model has been extended to the cases of multiple periods and multiple tasks, both with risk - averse and risk - neutral agents . There are also models that combine hidden action and hidden information . Since there is no data on unobservable variables, the contract - theoretic moral hazard model is difficult to test directly, but there have been some successful indirect tests with field data . </P> <Table> <Tr> <Td> </Td> <Td> This section includes a list of references, but its sources remain unclear because it has insufficient inline citations . Please help to improve this section by introducing more precise citations . (December 2012) (Learn how and when to remove this template message) </Td> </Tr> </Table> <Tr> <Td> </Td> <Td> This section includes a list of references, but its sources remain unclear because it has insufficient inline citations . Please help to improve this section by introducing more precise citations . (December 2012) (Learn how and when to remove this template message) </Td> </Tr> <P> Moral hazard problems also occur in employment relationships . When a firm is unable to observe all actions taken by its employees, it may be impossible to achieve efficient behavior in the workplace: for example, workers' effort may be inefficiently low . This is called the principal--agent problem, which is one possible explanation for the existence of involuntary unemployment . Similar problems may also occur at the managerial level because owners of firms (shareholders) may be unable to observe the actions of a firm's managers, opening the door to careless or self - serving decision - making . </P>

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