Information Economics with Real Estate Applications

Chapter 8 Hidden actions and moral hazard

In this chapter we address a number of challenges after agreeing to a contract, such as how to avoid moral hazard and incentivise the parties to perform to their best ability. Various ways of dealing with these risks are explained and illustrated in the context of property valuation, construction, and facility management.

8.1 Introduction

The typical situation studied in academic contract theory is the principal-agent situation. In the paper “The theory of contracts” by Hart & Holmstrom [21], they explicitly write that “...through-out we will restrict attention to cases in which informational asymmetries arise only subsequent to contracting” (Hart & Holmstrom [21], p. 74), i.e. they only consider ...