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Contracting with Repeated Moral Hazard and Private Evaluations

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  • William Fuchs

    ()
    (GSB Stanford Univeristy)

Abstract

A repeated moral hazard setting in which the Principal privately observes the Agentfs output is studied. It is shown that there is no loss from restricting the analysis to contracts in which the Agent is supposed to exert effort every period, receives a constant efficiency wage and no feedback until he is fired. The optimal contract for a finite horizon is characterized, and shown to require burning of resources. These are only burnt after the worst possible realization sequence and the amount is independent of both the length of the horizon and the discount factor (ƒÂ). For the infinite horizon case a family of fixed interval review contracts is characterized and shown to achieve first best as ƒÂ ¨ 1. The optimal contract when ƒÂ

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 431.

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Date of creation: 2005
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Handle: RePEc:red:sed005:431

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