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Only the Final Outcome Matters: Persistent Effects of Efforts in Dynamic Moral Hazard

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  • Ryo Ogawa

Abstract

We analyze a dynamic principal-agent problem in which the agent's effort in each period has strong persistent effects. We show that a simple contract, where the reward depends only on the final outcome, is explained as the optimal contract derived in the principal's optimization problem. The paper also discusses that the optimality of such a simple payment scheme crucially depends on the first-order stochastic dominance of the final outcome under various effort sequences.

Suggested Citation

  • Ryo Ogawa, 2010. "Only the Final Outcome Matters: Persistent Effects of Efforts in Dynamic Moral Hazard," ISER Discussion Paper 0767rr, Institute of Social and Economic Research, Osaka University, revised May 2011.
    • Handle: RePEc:dpr:wpaper:0767rr
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    File URL: https://www.iser.osaka-u.ac.jp/library/dp/2010/DP0767RR.pdf
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