Long-Term Contracts and Moral Hazard

Richard A. Lambert

Bell Journal of Economics, 1983, vol. 14, issue 2, pages 441-452

Abstract: This article extends the economic theory of agency to a simple class of multiperiod situations. In this context we study the role of long-term contracts in controlling moral hazard problems. We characterize the optimal long-term contract, and show that even when the "environment" is separable over time, the agent's compensation in one period will depend on his performance in that period and his performance in the prior periods.

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