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Repeated moral hazard and contracts with memory: The case of risk-neutrality

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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 agent can exert unobservable effort, leading to success or failure. Incentives provided in the second period act as carrot and stick for the first period, so that the effort level induced in the second period is higher after a first-period 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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28823.

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Date of creation: Jan 2011
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Handle: RePEc:pra:mprapa:28823

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

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Cited by:
  1. Kräkel, Matthias & Müller, Daniel, 2013. "Bad Mergers Revisited: An Incentive Perspective," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79914, Verein für Socialpolitik / German Economic Association.
  2. Kräkel, Matthias & Schöttner, Anja, 2012. "Internal labor markets and worker rents," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 491-509.
  3. Nieken, Petra & Schmitz, Patrick W., 2012. "Repeated moral hazard and contracts with memory: A laboratory experiment," Games and Economic Behavior, Elsevier, vol. 75(2), pages 1000-1008.
  4. Kräkel, Matthias & Müller, Daniel, 2013. "Merger Efficiency and Managerial Incentives," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 410, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  5. Luigi Balletta & Giovanni Immordino, 2013. "On Repeated Moral Hazard with a Present Biased Agent," CSEF Working Papers 341, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  6. Kräkel, Matthias, 2013. "Authority and Incentives in Organizations," IZA Discussion Papers 7271, Institute for the Study of Labor (IZA).
  7. Ulf Axelson & Philip Bond, 2011. "Investment banking careers: An equilibrium theory of overpaid jobs," FMG Discussion Papers dp690, Financial Markets Group.
  8. Schmitz, Patrick W., 2013. "Job design with conflicting tasks reconsidered," European Economic Review, Elsevier, vol. 57(C), pages 108-117.
  9. Demougin, Dominique & Helm, Carsten, 2011. "Job matching when employment contracts suffer from moral hazard," European Economic Review, Elsevier, vol. 55(7), pages 964-979.
  10. Matthias Kräkel & Anja Schöttner, 2014. "Optimal Sales Force Compensation," Working Paper Series of the Department of Economics, University of Konstanz 2014-09, Department of Economics, University of Konstanz.

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