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Repeated moral hazard with persistence

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  • Toshihiko Mukoyama

  • Ayşegül Şahin

Abstract

This paper considers the optimal contract when the current (hidden) action of an agent has a persistent effect on the future outcome. The optimal contract in a two-effort choice, two-period setting is characterized analytically and numerically. In particular, we show that persistence tends to make compensation less responsive to the first-period outcome. At the extreme, there are cases where the agent is perfectly insured against the first-period outcome: the agent obtains the same utility regardless of the first-period outcome. The model is extended to three periods. We also present a computational method to characterize an N-period model with two-period persistence. Copyright Springer-Verlag Berlin/Heidelberg 2005

Suggested Citation

  • Toshihiko Mukoyama & Ayşegül Şahin, 2005. "Repeated moral hazard with persistence," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(4), pages 831-854, June.
    • Handle: RePEc:spr:joecth:v:25:y:2005:i:4:p:831-854
    DOI: 10.1007/s00199-004-0488-2
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    Cited by:

    1. Wang, Cheng & Williamson, Stephen D., 2002. "Moral hazard, optimal unemployment insurance, and experience rating," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1337-1371, October.
    2. Koehne, Sebastian & Kuhn, Moritz, 2013. "Optimal capital taxation for time-nonseparable preferences," MPRA Paper 45203, University Library of Munich, Germany.
    3. Braz Camargo & Elena Pastorino, 2016. "Learning-by-Employing: The Value of Commitment under Uncertainty," Journal of Labor Economics, University of Chicago Press, vol. 34(3), pages 581-620.
    4. Amal Hili & Didier Laussel & Ngo Van Long, 2017. "Disentangling managerial incentives from a dynamic perspective: The role of stock grants," Pacific Economic Review, Wiley Blackwell, vol. 22(5), pages 743-771, December.
    5. Arie, Guy, 2016. "Dynamic costs and moral hazard: A duality-based approach," Journal of Economic Theory, Elsevier, vol. 166(C), pages 1-50.
    6. Jarque, Arantxa, 2010. "Repeated moral hazard with effort persistence," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2412-2423, November.
    7. Hugo Hopenhayn & Arantxa Jarque, 2006. "Moral Hazard and Persistence," 2006 Meeting Papers 670, Society for Economic Dynamics.
    8. Clementi, Gian Luca & Cooley, Thomas F. & Wang, Cheng, 2006. "Stock grants as a commitment device," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2191-2216, November.
    9. Hugo Hopenhayn & Arantxa Jarque, 2010. "Unobservable Persistent Productivity and Long Term Contracts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 333-349, April.
    10. Jacek Rothert, 2015. "Monitoring, moral hazard, and turnover," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(2), pages 355-374, February.
    11. Schmitz, Patrick W. & Ohlendorf, Susanne, 2008. "Repeated Moral Hazard, Limited Liability, and Renegotiation," CEPR Discussion Papers 6725, C.E.P.R. Discussion Papers.
    12. Vincent Anesi & Philippe De Donder, 2013. "A coalitional theory of unemployment insurance and employment protection," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(3), pages 941-977, April.
    13. Liu, Wenyue & Cadenillas, Abel, 2023. "Optimal insurance contracts for a shot-noise Cox claim process and persistent insured's actions," Insurance: Mathematics and Economics, Elsevier, vol. 109(C), pages 69-93.
    14. Suehyun Kwon, 2016. "Relational contracts in a persistent environment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(1), pages 183-205, January.

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    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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