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Contracting with Repeated Moral Hazard and Private Evaluations

  • William Fuchs

    (University of Chicago)

A repeated moral hazard setting in which the Principal privately observes the Agentfs output is studied. It is shown that there is no loss from restricting the analysis to contracts in which the Agent is supposed to exert effort every period, receives a constant efficiency wage and no feedback until he is fired. The optimal contract for a finite horizon is characterized, and shown to require burning of resources. These are only burnt after the worst possible realization sequence and the amount is independent of both the length of the horizon and the discount factor (ƒÂ). For the infinite horizon case a family of fixed interval review contracts is characterized and shown to achieve first best as ƒÂ ¨ 1. The optimal contract when ƒÂ

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File URL: http://128.118.178.162/eps/game/papers/0511/0511007.pdf
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Paper provided by EconWPA in its series Game Theory and Information with number 0511007.

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Length: 40 pages
Date of creation: 21 Nov 2005
Date of revision:
Handle: RePEc:wpa:wuwpga:0511007
Note: Type of Document - pdf; pages: 40
Contact details of provider: Web page: http://128.118.178.162

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