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Long-Term Contracts and Moral Hazard

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  • Richard A. Lambert
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    Abstract

    This article extends the economic theory of agency to a simple class of multiperiod situations. In this context we study the role of long-term contracts in controlling moral hazard problems. We characterize the optimal long-term contract, and show that even when the "environment" is separable over time, the agent's compensation in one period will depend on his performance in that period and his performance in the prior periods.

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    File URL: http://links.jstor.org/sici?sici=0361-915X%28198323%2914%3A2%3C441%3ALCAMH%3E2.0.CO%3B2-U&origin=repec
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    Bibliographic Info

    Article provided by The RAND Corporation in its journal Bell Journal of Economics.

    Volume (Year): 14 (1983)
    Issue (Month): 2 (Autumn)
    Pages: 441-452

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    Handle: RePEc:rje:bellje:v:14:y:1983:i:autumn:p:441-452

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    Cited by:
    1. Edmans, Alex & Gabaix, Xavier & Sadzik, Tomasz & Sannikov, Yuliy, 2010. "Dynamic Incentive Accounts," Working Papers 10-19, University of Pennsylvania, Wharton School, Weiss Center.
    2. Iossa, Elisabetta & Rey, Patrick, 2012. "Building Reputation for Contract Renewal: Implications for Performance Dynamics and Contract Duration," TSE Working Papers 12-368, Toulouse School of Economics (TSE).
    3. Michael Fung, 2013. "A trade-off between non-fundamental risk and incentives," Review of Quantitative Finance and Accounting, Springer, vol. 41(1), pages 29-51, July.
    4. Neil Doherty & Kent Smetters, 2002. "Moral Hazard in Reinsurance Markets," NBER Working Papers 9050, National Bureau of Economic Research, Inc.
    5. Jens Robert Schöndube, 2007. "Early versus late effort in dynamic agencies with learning about productivity," FEMM Working Papers 07026, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    6. Paul L. Joskow & Nancy L. Rose, 1994. "CEO Pay and Firm Performance: Dynamics, Asymmetries, and Alternative Performance Measures," NBER Working Papers 4976, National Bureau of Economic Research, Inc.
    7. Luigi Balletta & Giovanni Immordino, 2013. "On Repeated Moral Hazard with a Present Biased Agent," CSEF Working Papers 341, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    8. Yılmaz, Murat, 2013. "Repeated moral hazard with a time-inconsistent agent," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 70-89.
    9. Luis H.B. Braido, 2005. "Risk and Insurance in Sharecropping," Risk and Insurance 0508002, EconWPA.
    10. Luis H. B. Braido, 2003. "Insurance and Incentives in Sharecropping," CESifo Working Paper Series 1098, CESifo Group Munich.

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