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Repeated moral hazard with effort persistence

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  • Jarque, Arantxa

Abstract

I study a problem of repeated moral hazard where the effect of effort is persistent over time: each period's outcome distribution is a function of a geometrically distributed lag of past efforts. I show that when the utility of the agent is linear in effort, a simple rearrangement of terms in his lifetime utility translates this problem into a related standard repeated moral hazard. The solutions for consumption in the two problems are observationally equivalent, implying that the main properties of the optimal contract remain unchanged with persistence. For illustration, I present the computed solution of an example.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 145 (2010)
Issue (Month): 6 (November)
Pages: 2412-2423

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Handle: RePEc:eee:jetheo:v:145:y:2010:i:6:p:2412-2423

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: Moral hazard Repeated agency Persistence;

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References

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  9. Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, vol. 59(4), pages 1069-89, July.
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  12. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
  13. Arpad Abraham & Nicola Pavoni, 2008. "Efficient Allocations with Moral Hazard and Hidden Borrowing and Lending: A Recursive Formulation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 781-803, October.
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  15. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
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Citations

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Cited by:
  1. Jovanovic, Boyan & Prat, Julien, 0. "Dynamic contracts when agent'’s quality is unknown," Theoretical Economics, Econometric Society.
  2. Koeppl, Thorsten Volker & Monnet, Cyril & Temzelides, Ted, 2006. "A dynamic model of settlement," Working Paper Series 0604, European Central Bank.
  3. Hugo Hopenhayn & Arantxa Jarque, 2007. "Moral hazard and persistence," Working Paper 07-07, Federal Reserve Bank of Richmond.
  4. Jean Guillaume Forand, 2012. "Useless Prevention vs. Costly Remediation," Working Papers 1207, University of Waterloo, Department of Economics, revised Dec 2012.
  5. Moritz Meyer-ter-Vehn & Simon Board, 2009. "Reputation for Quality," 2009 Meeting Papers 160, Society for Economic Dynamics.
  6. Moritz Kuhn & Sebastian Koehne, 2013. "Optimal capital taxation for time-nonseparable preferences," 2013 Meeting Papers 322, Society for Economic Dynamics.
  7. Hugo H. Hopenhayn & Arantxa Jarque, 2009. "Unobservable Persistant Productivity and Long Term Contracts," Economics Working Papers we092717, Universidad Carlos III, Departamento de Economía.
  8. Braz Camargo & Elena Pastorino, 2012. "Learning-by-employing: the value of commitment under uncertainty," Staff Report 475, Federal Reserve Bank of Minneapolis.
  9. Prat, Julien & Jovanovic, Boyan, 2010. "Dynamic Incentive Contracts under Parameter Uncertainty," IZA Discussion Papers 5323, Institute for the Study of Labor (IZA).
  10. Jacek Rothert, 2009. "Monitoring, Moral Hazard and Turnover," Department of Economics Working Papers 130124, The University of Texas at Austin, Department of Economics, revised Sep 2012.
  11. Arantxa Jarque, 2010. "Hidden effort, learning by doing, and wage dynamics," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 339-372.

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