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Repeated moral hazard with effort persistence

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  • Arantxa Jarque

Abstract

I study a problem of repeated moral hazard in which the effect of effort is persistent over time: each period's outcome distribution is a function of a geometrically distributed lag of past efforts. I show that when the utility of the agent is linear in effort, a simple rearrangement of terms in his lifetime utility translates this problem into a related standard repeated moral hazard. The solutions for consumption in the two problems are observationally equivalent, implying that the main properties of the optimal contract remain unchanged with persistence. To illustrate, I present the computed solution of an example. ; See also: WP 07-07

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 08-04.

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Date of creation: 2008
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Handle: RePEc:fip:fedrwp:08-04
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Keywords: Microeconomics ; Economics;

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Find related papers by JEL classification:
  • D30 - Microeconomics - - Distribution - - - General
  • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
  • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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  2. Narayana Kocherlakota, 2010. "Figuring out the impact of hidden savings on optimal unemployment insuranc," Levine's Working Paper Archive 506439000000000291, David K. Levine.
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  8. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
  9. Abraham, Arpad & Pavoni, Nicola, 2004. "Efficient Allocations with Moral Hazard and Hidden Borrowing and Lending," Working Papers 04-05, Duke University, Department of Economics.
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  13. Andrew Atkeson, 2010. "International lending with moral hazard and risk of repudiation," Levine's Working Paper Archive 200, David K. Levine.
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  15. Stephen E. Spear & Sanjay Srivastava, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 599-617.
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  17. Atkeson Andrew & Lucas Jr. , Robert E., 1995. "Efficiency and Equality in a Simple Model of Efficient Unemployment Insurance," Journal of Economic Theory, Elsevier, vol. 66(1), pages 64-88, June.
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Cited by:

  1. Koehne, Sebastian & Kuhn, Moritz, 2013. "Optimal capital taxation for time-nonseparable preferences," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79951, Verein für Socialpolitik / German Economic Association.
  2. Koeppl, Thorsten & Monnet, Cyril & Temzelides, Ted, 2008. "A dynamic model of settlement," Journal of Economic Theory, Elsevier, vol. 142(1), pages 233-246, September.
  3. Jovanovic, Boyan & Prat, Julien, 2014. "Dynamic contracts when agent's quality is unknown," Theoretical Economics, Econometric Society, vol. 9(3), September.
  4. Hugo A. Hopenhayn & Arantxa Jarque, 2007. "Moral hazard and persistence," Working Paper 07-07, Federal Reserve Bank of Richmond.
  5. Arantxa Jarque, 2010. "Hidden effort, learning by doing, and wage dynamics," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 339-372.
  6. 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.
  7. Jacek Rothert, 2009. "Monitoring, Moral Hazard and Turnover," Department of Economics Working Papers 130124, The University of Texas at Austin, Department of Economics, revised Sep 2012.
  8. Simon Board & Moritz Meyer‐ter‐Vehn, 2013. "Reputation for Quality," Econometrica, Econometric Society, vol. 81(6), pages 2381-2462, November.
  9. Braz Camargo & Elena Pastorino, 2012. "Learning-by-employing: the value of commitment under uncertainty," Staff Report 475, Federal Reserve Bank of Minneapolis.
  10. Prat, Julien & Jovanovic, Boyan, 2010. "Dynamic Incentive Contracts under Parameter Uncertainty," IZA Discussion Papers 5323, Institute for the Study of Labor (IZA).
  11. Jean Guillaume Forand, 2012. "Useless Prevention vs. Costly Remediation," Working Papers 1207, University of Waterloo, Department of Economics, revised Feb 2015.

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