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Adverse Selection in Dynamic Moral Hazard

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Author Info
Ma, Ching-to Albert

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Abstract

This paper studies a multiperiod moral hazard problem under two assumptions: (1) contracts are subject to renegotiations and (2) the agent's action has long-term effects. The action is also interpreted as a choice of characteristic or "type." Renegotiation-proof contracts that implement various actions, including random ones, are characterized. Under appropriate conditions, the equilibrium involves the principal implementing a random action. Therefore, the equilibrium has standard properties of "adverse selection" models. Copyright 1991, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Publisher Info
Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 106 (1991)
Issue (Month): 1 (February)
Pages: 255-75
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Handle: RePEc:tpr:qjecon:v:106:y:1991:i:1:p:255-75

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  1. Steven A. Matthews, 1991. "Renegotiation of Sales Contracts under Moral Hazard," Discussion Papers 950, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  2. Dewatripont, Mathias & Legros, Patrick & Matthews, Steven A, 2002. "Moral Hazard and Capital Structure Dynamics," CEPR Discussion Papers 3487, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. repec:bep:mactop:v:6:y:2006:i:1:p:1296-1296 is not listed on IDEAS
  4. Felipe Balmaceda, . "Compensation Methods in Competitive Labor Markert," ILADES-Georgetown University Working Papers inv118, Ilades-Georgetown University, School of Economics and Bussines. [Downloadable!]
  5. F. Gul, 2000. "Unobservable Investment and the Hold-Up Problem," Princeton Economic Theory Papers 00s10, Economics Department, Princeton University.
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  6. Frank Gigler & Thomas Hemmer, 2008. "On the welfare effects of allowing unlimited renegotiation in agency relationships," Economic Theory, Springer, vol. 37(2), pages 243-265, November. [Downloadable!] (restricted)
  7. Ohlendorf, Susanne & Schmitz, Patrick W., 2008. "Repeated Moral Hazard, Limited Liability, and Renegotiation," CEPR Discussion Papers 6725, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. Steven Matthews, 2002. "Moral Hazard and Capital Structure Dynamics (joint with Mathias Dewatripont and Patrick Legros) Note the special time," Theory workshop papers 357966000000000095, UCLA Department of Economics. [Downloadable!]
  9. Schnedler, Wendelin & Sunde, Uwe, 2002. "The Hold-Down Problem and the Boundaries of the Firm: Lessons from a Hidden Action Model with Endogenous Outside Option," IZA Discussion Papers 464, Institute for the Study of Labor (IZA). [Downloadable!]
  10. Steven A. Matthews, 1993. "Renegotiation of Sales Contracts," Discussion Papers 1051, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
    Other versions:
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