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Repeated moral hazard with effort persistence

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  • Arantxa Jarque

Abstract

I study a problem of repeated moral hazard in which the effect of effort is persistent over time: each period's outcome distribution is a function of a geometrically distributed lag of past efforts. I show that when the utility of the agent is linear in effort, a simple rearrangement of terms in his lifetime utility translates this problem into a related standard repeated moral hazard. The solutions for consumption in the two problems are observationally equivalent, implying that the main properties of the optimal contract remain unchanged with persistence. To illustrate, I present the computed solution of an example. ; See also: WP 07-07

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 08-04.

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Date of creation: 2008
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Handle: RePEc:fip:fedrwp:08-04

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Keywords: Microeconomics ; Economics;

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References

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  10. Phelan, Christopher, 1994. "Incentives, insurance, and the variability of consumption and leisure," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 581-599.
  11. Phelan, J.C., 1990. "Incentives, Insurance And The Variability Of Con Somption And Leisure," Working papers 90-26, Wisconsin Madison - Social Systems.
  12. Atkeson Andrew & Lucas Jr. , Robert E., 1995. "Efficiency and Equality in a Simple Model of Efficient Unemployment Insurance," Journal of Economic Theory, Elsevier, vol. 66(1), pages 64-88, June.
  13. Abraham, Arpad & Pavoni, Nicola, 2004. "Efficient Allocations with Moral Hazard and Hidden Borrowing and Lending," Working Papers 04-05, Duke University, Department of Economics.
  14. 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.
  15. Arpad Abraham & Nicola Pavoni, 2008. "Efficient Allocations with Moral Hazard and Hidden Borrowing and Lending: A Recursive Formulation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 781-803, October.
  16. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
  17. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
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Citations

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Cited by:
  1. 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.
  2. Jovanovic, Boyan & Prat, Julien, 2010. "Dynamic Incentive Contracts under Parameter Uncertainty," CEPR Discussion Papers 8136, C.E.P.R. Discussion Papers.
  3. Simon Board & Moritz Meyer‐ter‐Vehn, 2013. "Reputation for Quality," Econometrica, Econometric Society, vol. 81(6), pages 2381-2462, November.
  4. Thorsten Koeppl & Cyril Monnet & Ted Temzelides, 2006. "A Dynamic Model of Settlement," Working Papers 1053, Queen's University, Department of Economics.
  5. Hugo Hopenhayn & Arantxa Jarque, 2006. "Moral Hazard and Persistence," 2006 Meeting Papers 670, Society for Economic Dynamics.
  6. Koehne, Sebastian & Kuhn, Moritz, 2013. "Optimal capital taxation for time-nonseparable preferences," MPRA Paper 45203, University Library of Munich, Germany.
  7. Jean Guillaume Forand, 2012. "Useless Prevention vs. Costly Remediation," Working Papers 1207, University of Waterloo, Department of Economics, revised Dec 2012.
  8. Jacek Rothert, 2009. "Monitoring, Moral Hazard and Turnover," Department of Economics Working Papers 130124, The University of Texas at Austin, Department of Economics, revised Sep 2012.
  9. Arantxa Jarque, 2010. "Hidden effort, learning by doing, and wage dynamics," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 339-372.
  10. Braz Camargo & Elena Pastorino, 2012. "Learning-by-employing: the value of commitment under uncertainty," Staff Report 475, Federal Reserve Bank of Minneapolis.

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