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A recursive formulation for repeated agency with history dependence

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Author Info
Ana Fernandes
Christopher Phelan

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Abstract

There is now an extensive literature regarding the efficient design of incentive mechanisms in dynamic environments. In this literature, there are no exogenous links across time periods because either privately observed shocks are assumed time independent or past private actions have no influence on the realizations of current variables. The absence of exogenous links across time periods ensures that preferences over continuation contracts are common knowledge, making the definition of incentive compatible contracts at a point in time a simple matter. In this paper, we present general recursive methods to handle environments where privately observed variables are linked over time. We show that incentive compatible contracts are implemented recursively with a threat keeping constraint in addition to the usual temporary incentive compatibility conditions.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 259.

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Date of creation: 1999
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Publication status: Published in Journal of Economic Theory (Vol. 19, no. 2, April 2000, pp. 223-247)
Handle: RePEc:fip:fedmsr:259

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Keywords: Contracts Employment (Economic theory) Econometric models

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  1. Harold L. Cole & Narayana R. Kocherlakota, 1999. "Efficient allocations with hidden income and hidden storage," Staff Report 238, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  2. Wang, Cheng, 1995. "Dynamic Insurance with Private Information and Balanced Budgets," Review of Economic Studies, Blackwell Publishing, vol. 62(4), pages 577-95, October. [Downloadable!] (restricted)
  3. Phelan, Christopher, 1994. "Incentives and Aggregate Shocks," Review of Economic Studies, Blackwell Publishing, vol. 61(4), pages 681-700, October. [Downloadable!] (restricted)
  4. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Blackwell Publishing, vol. 54(4), pages 599-617, October. [Downloadable!] (restricted)
  5. Phelan, C. & Townsend, R.M., 1990. "Computing Multiperiod, Information-Constrained Optima," University of Chicago - Economics Research Center 90-13, Chicago - Economics Research Center.
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  6. Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Blackwell Publishing, vol. 59(3), pages 427-53, July. [Downloadable!] (restricted)
  7. Besanko, David, 1985. "Multi-period contracts between principal and agent with adverse selection," Economics Letters, Elsevier, vol. 17(1-2), pages 33-37. [Downloadable!] (restricted)
  8. Harold L. Cole & Narayana Kocherlakota, 1998. "Dynamic games with hidden actions and hidden states," Staff Report 254, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  9. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August. [Downloadable!] (restricted)
  10. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
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  11. Phelan Christopher, 1995. "Repeated Moral Hazard and One-Sided Commitment," Journal of Economic Theory, Elsevier, vol. 66(2), pages 488-506, August. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marcus Hagedorn & Ashok Kaul & Tim Mennel, . "An Adverse Selection Model of Optimal Unemployment Insurance," IEW - Working Papers iewwp237, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  2. Carlos Eugênio Ellery Lustosa da Costa, 2005. "Yet Another Reason to Tax Goods," Economics Working Papers (Ensaios Economicos da EPGE) 596, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
  3. Radim Bohacek, 2001. "Capital Accumulation in an Economy with Heterogeneous Agents and Moral Hazard," GE, Growth, Math methods 0012001, EconWPA. [Downloadable!]
  4. Harold L. Cole & Narayana Kocherlakota, 1998. "Dynamic games with hidden actions and hidden states," Staff Report 254, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  5. Abraham Arpad & Nicola Pavoni, 2004. "Efficient Allocations, with Moral Hazard and Hidden Borrowing and Lending," Levine's Bibliography 122247000000000138, UCLA Department of Economics. [Downloadable!]
    Other versions:
  6. Mukoyama, Toshihiko & Sahin, Aysegül, 2004. "Repeated Moral Hazard with Persistence," Cahiers de recherche 01-2004, Centre interuniversitaire de recherche en économie quantitative, CIREQ. [Downloadable!]
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  7. Guido Menzio, 2007. "A Search Theory of Rigid Prices," PIER Working Paper Archive 07-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
  8. Hugo Hopenhayn & Arantxa Jarque, 2007. "Moral hazard and persistence," Working Paper 07-07, Federal Reserve Bank of Richmond. [Downloadable!]
  9. Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics 140, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  10. Marek Kapicka, 2006. "Optimal Income Taxation with Human Capital Accumulation and Limited Record Keeping," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 612-639, October. [Downloadable!] (restricted)
  11. Narayana R. Kocherlakota, 2005. "Monetary and Fiscal Policy: An Overview," Levine's Bibliography 122247000000000909, UCLA Department of Economics. [Downloadable!]
  12. Susan Athey & Kyle Bagwell, 2007. "Collusion with Persistent Cost Shocks," Levine's Bibliography 321307000000000898, UCLA Department of Economics. [Downloadable!]
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  13. Radim Bohacek, 2001. "Capital Accumulation And Moral Hazard In An Economy With Heterogeneous Agents," CeNDEF Workshop Papers, January 2001 1B.2, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  14. J. C. Parra & M. Huggett, 2005. "Quantifying the Inefficiency of the US Social Security System," Computing in Economics and Finance 2005 70, Society for Computational Economics. [Downloadable!]
  15. Noah Williams, 2008. "Persistent Private Information," NBER Working Papers 13894, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. 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!]
  17. Radim Bohacek, 2000. "Capital Accumulation in an Economy with Heterogeneous Agents and Moral Hazard," CERGE-EI Working Papers wp165, The Center for Economic Research and Graduate Education - Economic Institute, Prague. [Downloadable!]
  18. Narayana Kocherlakota, 2004. "Figuring out the Impact of Hidden Savings on Optimal Unemployment Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 541-554, July. [Downloadable!] (restricted)
  19. Peter Bardsley & Katerina Sherstyuk, 2006. "Rat Races and Glass Ceilings," Topics in Theoretical Economics, Berkeley Electronic Press, vol. 6(1), pages 1297-1297. [Downloadable!] (restricted)
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