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Repeated moral hazard with persistence

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  • Toshihiko Mukoyama

    ()

  • Ayşegül Şahin

    ()

Abstract

This paper considers the optimal contract when the current (hidden) action of an agent has a persistent effect on the future outcome. The optimal contract in a two-effort choice, two-period setting is characterized analytically and numerically. In particular, we show that persistence tends to make compensation less responsive to the first-period outcome. At the extreme, there are cases where the agent is perfectly insured against the first-period outcome: the agent obtains the same utility regardless of the first-period outcome. The model is extended to three periods. We also present a computational method to characterize an N-period model with two-period persistence. Copyright Springer-Verlag Berlin/Heidelberg 2005

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File URL: http://hdl.handle.net/10.1007/s00199-004-0488-2
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 25 (2005)
Issue (Month): 4 (06)
Pages: 831-854

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Handle: RePEc:spr:joecth:v:25:y:2005:i:4:p:831-854

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Related research

Keywords: Repeated moral hazard; Persistence; Human capital; Unemployment insurance.;

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References

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  1. Steven Shavell & Laurence Weiss, 1978. "The Optimal Payment of Unemployment Insurance Benefits over Time," Cowles Foundation Discussion Papers 503, Cowles Foundation for Research in Economics, Yale University.
  2. Phelan, Christopher & Townsend, Robert M, 1991. "Computing Multi-period, Information-Constrained Optima," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(5), pages 853-81, October.
  3. Wang, Cheng & Williamson, Stephen D., 2002. "Moral hazard, optimal unemployment insurance, and experience rating," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(7), pages 1337-1371, October.
  4. Atila Abdulkadiroglu & Burhanettin Kuruscu & Aysegul Sahin, 2002. "Unemployment Insurance and the Role of Self-Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 681-703, July.
  5. Ana Fernandes & Christopher Phelan, 1999. "A recursive formulation for repeated agency with history dependence," Staff Report, Federal Reserve Bank of Minneapolis 259, Federal Reserve Bank of Minneapolis.
  6. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 54(4), pages 599-617, October.
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Citations

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Cited by:
  1. Arantxa Jarque, 2005. "Repeated Moral Hazard with Effort Persistence," 2005 Meeting Papers 428, Society for Economic Dynamics.
  2. Clementi, Gian Luca & Cooley, Thomas F. & Wang, Cheng, 2006. "Stock Grants As a Commitment Device," Staff General Research Papers 12300, Iowa State University, Department of Economics.
  3. Koehne, Sebastian & Kuhn, Moritz, 2013. "Optimal capital taxation for time-nonseparable preferences," MPRA Paper 45203, University Library of Munich, Germany.
  4. Ohlendorf, Susanne & Schmitz, Patrick W., 2008. "Repeated Moral Hazard, Limited Liability, and Renegotiation," CEPR Discussion Papers 6725, C.E.P.R. Discussion Papers.
  5. Hugo Hopenhayn & Arantxa Jarque, 2006. "Moral Hazard and Persistence," 2006 Meeting Papers, Society for Economic Dynamics 670, Society for Economic Dynamics.
  6. Hugo Hopenhayn & Arantxa Jarque, 2010. "Unobservable Persistent Productivity and Long Term Contracts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 333-349, April.
  7. Braz Camargo & Elena Pastorino, 2012. "Learning-by-employing: the value of commitment under uncertainty," Staff Report, Federal Reserve Bank of Minneapolis 475, Federal Reserve Bank of Minneapolis.

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