Dynamic Moral Hazard and Project Completion

Robin Mason and Juuso Välimäki

No 6857, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyse a simple model of dynamic moral hazard in which there is a clear and tractable trade-off; between static and dynamic incentives. In our model, a principal wants an agent to complete a project. The agent undertakes unobservable effort, which affects in each period the probability that the project is completed. The principal pays only on completion of the project. We characterise the contracts that the principal sets, with and without commitment. We show that with full commitment, the contract involves the agent’s value and wage declining over time, in order to give the agent incentives to exert effort.

Keywords: continuous time; moral hazard; Principal-agent model; project completion (search for similar items in EconPapers)
JEL-codes: C73 D82 J31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cta and nep-ppm
Date: Written 2008-06

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