Optimal Bargaining and Moral Hazard

Abstract

In this paper we attempt to find the answer to the question of how the professional boxers behave ex post to additional money share negotiated ex ante. We find that for each fighter under a certain stake threshold there is an incentive to put in huge efforts for the forthcoming fight and that above that threshold, the opposite is true leading to a phenomenon of moral hazard. We also find that bargaining is successful in the absence of moral hazard. Finally, the optimal effort of the fighter will increase (decrease) for his (his opponents’) additional outside option.