Dynamic costs and moral hazard: A duality-based approach

Guy Arie

Journal of Economic Theory, 2016, vol. 166, issue C, 1-50

Abstract: The marginal cost of effort often increases as effort is exerted. In a dynamic moral hazard setting, dynamically increasing costs create information asymmetry. This paper characterizes the optimal contract and helps explain the popular yet thus far puzzling use of non-linear incentives, for example, in sales-force compensation. The result is obtained by complementing the standard dynamic program with a novel dynamic dual formulation. The dual program is monotonic and sub-modular, providing stronger results, including a proof for the sufficiency of one-shot deviations.

Keywords: Dynamic moral hazard; Nonlinear incentives; Private information; Dynamic mechanism design; Duality (search for similar items in EconPapers)
JEL-codes: C61 D82 D86 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:166:y:2016:i:c:p:1-50

DOI: 10.1016/j.jet.2016.08.002

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