Moral hazard and persistence
We study a multiperiod principal-agent problem with moral hazard in which effort is persistent: the agent is required to exert effort only in the initial period of the contract, and this effort determines the conditional distribution of output in the following periods. We provide a characterization of the optimal dynamic compensation scheme. As in a static moral hazard problem, consumption — regardless of time period — is ranked according to likelihood ratios of output histories. As in most dynamic models with asymmetric information, the inverse of the marginal utility of consumption satisfies the martingale property derived in Rogerson (1985). Under the assumption of i.i.d. output we show that (i) incentives are concentrated in the later periods of the contract, implying an increase of the variance of compensation over time; (ii) the cost of implementing high effort decreases when there is an increase in either the duration or the intensity of persistence (i.e., how long and how strongly effort affects the distribution of output, respectively); and (iii) under infinite duration the cost gets arbitrarily close to that of the first best.
|Date of creation:||2007|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.richmondfed.org/|
More information through EDIRC
|Order Information:|| Web: http://www.richmondfed.org/publications/ Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew Atkeson, 2010.
"International lending with moral hazard and risk of repudiation,"
Levine's Working Paper Archive
200, David K. Levine.
- Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, vol. 59(4), pages 1069-89, July.
- Steven Shavell & Laurence Weiss, 1978.
"The Optimal Payment of Unemployment Insurance Benefits over Time,"
Cowles Foundation Discussion Papers
503, Cowles Foundation for Research in Economics, Yale University.
- Shavell, Steven & Weiss, Laurence, 1979. "The Optimal Payment of Unemployment Insurance Benefits over Time," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1347-62, December.
- Kim, Son Ku, 1995. "Efficiency of an Information System in an Agency Model," Econometrica, Econometric Society, vol. 63(1), pages 89-102, January.
- Illoong Kwon, 2006. "Incentives, wages, and promotions: theory and evidence," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 100-120, 03.
- Ana Fernandes & Christopher Phelan, 1999.
"A recursive formulation for repeated agency with history dependence,"
259, Federal Reserve Bank of Minneapolis.
- Fernandes, Ana & Phelan, Christopher, 2000. "A Recursive Formulation for Repeated Agency with History Dependence," Journal of Economic Theory, Elsevier, vol. 91(2), pages 223-247, April.
- Grochulski, Borys & Piskorski, Tomasz, 2010.
"Risky human capital and deferred capital income taxation,"
Journal of Economic Theory,
Elsevier, vol. 145(3), pages 908-943, May.
- Borys Grochulski & Tomasz Piskorski, 2007. "Risky human capital and deferred capital income taxation," Working Paper 06-13, Federal Reserve Bank of Richmond.
- Phelan Christopher, 1995. "Repeated Moral Hazard and One-Sided Commitment," Journal of Economic Theory, Elsevier, vol. 66(2), pages 488-506, August.
- Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 285-315.
- Wang, Cheng, 1997.
"Incentives, CEO Compensation, and Shareholder Wealth in a Dynamic Agency Model,"
Journal of Economic Theory,
Elsevier, vol. 76(1), pages 72-105, September.
- Wang, Cheng, 1997. "Incentives, CEO Compensation and Shareholder Wealth in a Dynamic Agency Model," Staff General Research Papers Archive 5170, Iowa State University, Department of Economics.
- Wang, C., 1995. "Incentives, CEO Compensation, and Shareholder Wealth in a Dynamic Agency Model," GSIA Working Papers 1995-08, Carnegie Mellon University, Tepper School of Business.
- Sanford Grossman & Oliver Hart, .
"An Analysis of the Principal-Agent Problem,"
Rodney L. White Center for Financial Research Working Papers
15-80, Wharton School Rodney L. White Center for Financial Research.
- MUKOYAMA, Toshihiko & SAHIN, Aysegül, 2004.
"Repeated Moral Hazard with Persistence,"
Cahiers de recherche
01-2004, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
- Jarque, Arantxa, 2010.
"Repeated moral hazard with effort persistence,"
Journal of Economic Theory,
Elsevier, vol. 145(6), pages 2412-2423, November.
- Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997.
"Optimal Unemployment Insurance,"
Journal of Political Economy,
University of Chicago Press, vol. 105(2), pages 412-38, April.
- Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
- Lars Ljungqvist & Thomas Sargent, 1999. "Matlab code for Hopenhayn-Nicolini's optimal unemployment insurance model," QM&RBC Codes 18, Quantitative Macroeconomics & Real Business Cycles.
When requesting a correction, please mention this item's handle: RePEc:fip:fedrwp:07-07. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Pascasio)
If references are entirely missing, you can add them using this form.