Moral Hazard and Persistence
AbstractWe study a multiperiod principal-agent problem with moral hazard in which the agent is required to exert effort only in the initial period of the contract. The effort choice of the agent in this first period determines the conditional distribution of output in the following periods. The paper characterizes the optimal compensation scheme. We find that the results for the static moral hazard problem extend to this setting: consumption at each point in time is ranked according to the likelihood ratio of the corresponding history. As the length of the contract increases, the cost of implementing effort decreases, and consumption on the equilibrium path becomes less volatile. If the contract lasts for an infinite number of periods, assuming the effect of effort does not depreciate with time, the cost of the principal gets arbitrarily close to that of the first best
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 670.
Date of creation: 03 Dec 2006
Date of revision:
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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mechanism design; moral hazard; persistence; dynamic contracts;
Other versions of this item:
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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