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Repeated Moral Hazard And Contracts With Memory: The Case Of Risk‐Neutrality

  • Susanne Ohlendorf
  • Patrick W. Schmitz

We consider a repeated moral hazard problem, where both the principal and the wealth-constrained agent are risk-neutral. In each of two periods, the agent can exert unobservable effort, leading to success or failure. Incentives provided in the second period act as carrot and stick for the first period, so that the effort level induced in the second period is higher after a first-period success than after a failure. If renegotiation cannot be prevented, the principal may prefer a project with lower returns; i.e., a project may be "too good" to be financed or, similarly, an agent can be "overqualified."

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 53 (2012)
Issue (Month): 2 (05)
Pages: 433-452

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Handle: RePEc:wly:iecrev:v:53:y:2012:i:2:p:433-452
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