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Efficient Allocations in a Dynamic Moral Hazard Economy

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  • Noah Williams

Abstract

We study a dynamic general equilibrium model with production, in which a representative agent chooses an unobservable effort level. We cast the problem as a continuous time principal agent model. We study the problem of a central planner (the principal) choosing optimal allocations of consumption and effort for the representative agent (the agent). When effort is observed, the full information problem results in the standard optimal growth solution. When the principal cannot observe effort, but can observe consumption, optimal allocations can be found via a contract which conditions on the agent's continuation utility. In each case, we characterize the optimal contract via a first-order approach, relying on results in Williams (2004). We then examine the impact of incentive constraints on equilibrium consumption and output dynamics and asset prices

Suggested Citation

  • Noah Williams, 2005. "Efficient Allocations in a Dynamic Moral Hazard Economy," Computing in Economics and Finance 2005 61, Society for Computational Economics.
    • Handle: RePEc:sce:scecf5:61
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    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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