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The curse of long horizons

Author

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  • Bhaskar, V.
  • Mailath, George J.

Abstract

We study dynamic moral hazard when the principal can only commit to spot contracts. The principal and agent are ex ante symmetrically uncertain about the difficulty of the job, and update their beliefs upon observing output. Since the agent’s effort is private, he has an additional incentive to shirk when the principal induces effort: shirking results in the principal having incorrect beliefs, giving rise to future informational rents. We show that the effort-inducing contract must provide increasingly high-powered incentives as the length of the relationship increases. Thus it is never optimal to always induce effort in very long relationships.

Suggested Citation

  • Bhaskar, V. & Mailath, George J., 2019. "The curse of long horizons," Journal of Mathematical Economics, Elsevier, vol. 82(C), pages 74-89.
    • Handle: RePEc:eee:mateco:v:82:y:2019:i:c:p:74-89
    DOI: 10.1016/j.jmateco.2019.01.009
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    Cited by:

    1. Cetemen, Doruk & Hwang, Ilwoo & Kaya, Ayça, 2020. "Uncertainty-driven cooperation," Theoretical Economics, Econometric Society, vol. 15(3), July.
    2. Bhaskar, V & Roketskiy, Nikita, 2023. "The ratchet effect: A learning perspective," Journal of Economic Theory, Elsevier, vol. 214(C).
    3. Ekmekci, Mehmet & Maestri, Lucas, 2019. "Reputation and screening in a noisy environment with irreversible actions," MPRA Paper 100885, University Library of Munich, Germany.
    4. Bhaskar, V. & Mailath, George J., 2019. "The curse of long horizons," Journal of Mathematical Economics, Elsevier, vol. 82(C), pages 74-89.
    5. Johannes Abeler & David Huffman & Collin Raymond, 2025. "Incentive Complexity, Bounded Rationality, and Effort Provision," American Economic Review, American Economic Association, vol. 115(12), pages 4404-4437, December.
    6. Gao, Hong & Xu, Haibo, 2020. "Learning, belief manipulation and optimal relationship termination," Economics Letters, Elsevier, vol. 190(C).
    7. Abeler, Johannes & Huffman, David B. & Raymond, Collin, 2023. "Incentive Complexity, Bounded Rationality and Effort Provision," IZA Discussion Papers 16284, IZA Network @ LISER.

    More about this item

    Keywords

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    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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