On Repeated Moral Hazard with a Present Biased Agent
AbstractThis paper introduces time inconsistent preferences into a moral hazard setting where the agent is risk-averse. We derive a necessary optimality condition on the consumption allocation that is different from the so-called Inverse Euler Equation of Rogerson (1985). Specifically, inverse marginal utility is not a martingale, rather it follows a partial adjustment process. If the bias for the present is sufficiently large the optimal allocation will leave the agent with the desire to borrow. We extend the analysis to the case in which the principal does not know if the agent is time consistent or not. Finally, we show that in a setting with a risk-neutral agent and limited liability everything is as if the principal faces a time consistent agent.
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Bibliographic InfoPaper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 341.
Date of creation: 25 Sep 2013
Date of revision:
repeated moral hazard; time-inconsistency;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-05 (All new papers)
- NEP-CTA-2013-10-05 (Contract Theory & Applications)
- NEP-HRM-2013-10-05 (Human Capital & Human Resource Management)
- NEP-MIC-2013-10-05 (Microeconomics)
- NEP-UPT-2013-10-05 (Utility Models & Prospect Theory)
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