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Contracting with Repeated Moral Hazard and Private Evaluations

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  • William Fuchs

    (Stanford University)

Abstract

A repeated moral hazard setting in which the Principal privately observes the Agent’s 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 (d). For the infinite horizon case a family of fixed interval review contracts is characterized and shown to achieve first best as d ? 1. The optimal contract when d

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Bibliographic Info

Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 04-012.

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Date of creation: Apr 2005
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Handle: RePEc:sip:dpaper:04-012

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