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Repeated Moral Hazard, Limited Liability, and Renegotiation

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  • Ohlendorf, Susanne
  • Schmitz, Patrick W.

Abstract

We consider a repeated moral hazard problem, where both the principal and the wealth-constrained agent are risk-neutral. In each of two periods, the principal can make an investment and the agent can exert unobservable effort, leading to success or failure. Incentives in the second period act as carrot and stick for the first period, so that effort is higher after a success than after a failure. If renegotiation cannot be prevented, the principal may prefer a project with lower returns; i.e., a project may be "too good" to be financed or, similarly, an agent can be "overqualified."

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6725.

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Date of creation: Feb 2008
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Handle: RePEc:cpr:ceprdp:6725

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Keywords: Dynamic moral hazard; hidden actions; limited liability;

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References

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Citations

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Cited by:
  1. David Martimort & Stéphane Straub, 2011. "How to Design Public-Private Partnerships in a Warming World? - When Infrastructure Becomes a Really “Hot” Topic," Working Papers 2011/25, Maastricht School of Management.
  2. Martimort, David & Straub, Stéphane, 2012. "How to Design Infrastructure Contracts in a Warming World? A Critical Appraisal of Public-Private Partnerships," IDEI Working Papers 724, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Nieken, Petra & Schmitz, Patrick W, 2011. "Repeated moral hazard and contracts with memory: A laboratory experiment," CEPR Discussion Papers 8241, C.E.P.R. Discussion Papers.
  4. Matthias Kräkel & Anja Schöttner, 2009. "Minimum Wages and Excessive Effort Supply," Bonn Econ Discussion Papers bgse8_2009, University of Bonn, Germany.
  5. Stefanie Aniela Lehmann, 2008. "When Randomization in Collective Tournaments is Profitable for the Principal," Bonn Econ Discussion Papers bgse19_2008, University of Bonn, Germany, revised Mar 2009.

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