Repeated moral hazard and contracts with memory: The case of risk-neutrality

Ohlendorf, Susanne and Schmitz, Patrick W. (2011): Repeated moral hazard and contracts with memory: The case of risk-neutrality.

Abstract

We consider a repeated moral hazard problem, where both the principal and the wealth-constrained agent are risk-neutral. In each of two periods, the agent can exert unobservable effort, leading to success or failure. Incentives provided in the second period act as carrot and stick for the first period, so that the effort level induced in the second period is higher after a first-period success than after a failure. If renegotiation cannot be prevented, the principal may prefer a project with lower returns; i.e., a project may be "too good" to be financed or, similarly, an agent can be "overqualified."

• Item Type: MPRA Paper
• Language: English
• Keywords: Dynamic moral hazard; hidden actions; limited liability
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M5 - Personnel Economics > M52 - Compensation and Compensation Methods and Their Effects; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages ; Payment Methods; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games ; Evolutionary Games ; Repeated Games

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