Dynamic Contract Design in the Presence of Double Moral Hazard

Feng Tian (), Ekaterina Astashkina () and Izak Duenyas ()
Additional contact information
Feng Tian: HKU Business School, The University of Hong Kong, Hong Kong; and HKU Business School Shenzhen Research Institute, Shenzhen 518000, China
Ekaterina Astashkina: Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
Izak Duenyas: Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109

Management Science, 2025, vol. 71, issue 8, 6475-6494

Abstract: We consider a stylized incentive management problem over an infinite time horizon, where the principal hires an agent to provide services to customers. Customers request service in one of two ways: either via an online or a traditional offline channel. The principal does not observe the offline customers’ arrivals, nor does she observe whether the agent exerts (costly) effort that can increase the arrival rate of customers. This creates an opportunity for the agent (i) to divert cash (that is, to under-report the number of offline customers and pocket respective revenues) and also (ii) to shirk (that is, not to exert effort), thus leading to a novel and thus far unexplored double moral hazard problem. To address this problem, we formulate a constrained, continuous-time, stochastic optimal control problem and derive an optimal contract with a simple intuitive structure that includes a payment scheme and a potential termination time of the agent. We enrich the model to allow the principal to either (i) dynamically adjust the prices for the services in both channels or (ii) monitor the agent. Both tools help the principal to alleviate the double moral hazard problem. We derive respective optimal strategies for using those tools that guarantee the highest profits. We show that the worse the agent’s past performance is, the lower the prices should be set and the more the principal should monitor the agent.

Keywords: dynamic contract; jump process; double moral hazard (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2022.01169 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:8:p:6475-6494

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().