On Repeated Moral Hazard with a Present Biased Agent

Luigi Balletta () and Giovanni Immordino
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Luigi Balletta: Università di Palermo

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: This paper introduces time inconsistent preferences into a moral hazard setting where the agent is risk-averse. We derive a necessary optimality condition on the consumption allocation that is different from the so-called Inverse Euler Equation of Rogerson (1985). Specifically, inverse marginal utility is not a martingale, rather it follows a partial adjustment process. If the bias for the present is sufficiently large the optimal allocation will leave the agent with the desire to borrow. We extend the analysis to the case in which the principal does not know if the agent is time consistent or not. Finally, we show that in a setting with a risk-neutral agent and limited liability everything is as if the principal faces a time consistent agent.

Keywords: repeated moral hazard; time-inconsistency (search for similar items in EconPapers)
JEL-codes: D03 D82 D86 E21 (search for similar items in EconPapers)
Date: 2013-09-25
New Economics Papers: this item is included in nep-cta, nep-hrm, nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:341

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