Efficient Allocations in a Dynamic Moral Hazard Economy
AbstractWe study a dynamic general equilibrium model with production, in which a representative agent chooses an unobservable effort level. We cast the problem as a continuous time principal agent model. We study the problem of a central planner (the principal) choosing optimal allocations of consumption and effort for the representative agent (the agent). When effort is observed, the full information problem results in the standard optimal growth solution. When the principal cannot observe effort, but can observe consumption, optimal allocations can be found via a contract which conditions on the agent's continuation utility. In each case, we characterize the optimal contract via a first-order approach, relying on results in Williams (2004). We then examine the impact of incentive constraints on equilibrium consumption and output dynamics and asset prices
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 61.
Date of creation: 11 Nov 2005
Date of revision:
Other versions of this item:
- Noah Williams, 2006. "Efficient Allocations in a Dynamic Moral Hazard Economy," 2006 Meeting Papers 138, Society for Economic Dynamics.
- E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
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