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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 where 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. For illustration, I present the computed solution of an example.
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Suggested Citation

  • Arantxa Jarque, 2005. "Repeated Moral Hazard with Effort Persistence," 2005 Meeting Papers 428, Society for Economic Dynamics.
  • Handle: RePEc:red:sed005:428
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    References listed on IDEAS

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    1. Christopher Phelan & Robert M. Townsend, 1991. "Computing Multi-Period, Information-Constrained Optima," Review of Economic Studies, Oxford University Press, vol. 58(5), pages 853-881.
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    Citations

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    Cited by:

    1. Hugo Hopenhayn & Arantxa Jarque, 2006. "Moral Hazard and Persistence," 2006 Meeting Papers 670, Society for Economic Dynamics.
    2. Prat, Julien & Jovanovic, Boyan, 2014. "Dynamic contracts when agent's quality is unknown," Theoretical Economics, Econometric Society, vol. 9(3), September.
    3. 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.
    4. 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.
    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. Simon Board & Moritz Meyer‐ter‐Vehn, 2013. "Reputation for Quality," Econometrica, Econometric Society, vol. 81(6), pages 2381-2462, November.
    7. Jean Guillaume Forand, 2012. "Useless Prevention vs. Costly Remediation," Working Papers 1207, University of Waterloo, Department of Economics, revised Feb 2015.
    8. Koeppl, Thorsten & Monnet, Cyril & Temzelides, Ted, 2008. "A dynamic model of settlement," Journal of Economic Theory, Elsevier, vol. 142(1), pages 233-246, September.
    9. Moritz Kuhn & Sebastian Koehne, 2013. "Optimal capital taxation for time-nonseparable preferences," 2013 Meeting Papers 322, Society for Economic Dynamics.
    10. 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.
    11. Braz Camargo & Elena Pastorino, 2012. "Learning-by-employing: the value of commitment under uncertainty," Staff Report 475, Federal Reserve Bank of Minneapolis.
    12. Roman Inderst & Marcus Opp & Florian Hoffmann, 2016. "Deferred compensation and risk-taking incentives," 2016 Meeting Papers 674, Society for Economic Dynamics.

    More about this item

    Keywords

    mechanism design; repeated agency; persistence;

    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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