Dynamic agency with persistent observable shocks

Rui Li

Journal of Mathematical Economics, 2017, vol. 71, issue C, 74-91

Abstract: This paper studies a continuous-time hidden-action model with persistent observable shocks. In this model, I develop a method to characterize the optimal contract with history-dependent effort exertion and shirking decisions. Temporal shirking is always optimal after some histories as long as a positive persistent shock is expected. As a result, my model gives rise to a mechanism through which the moral hazard problem amplifies macroeconomic fluctuations. I also show the pattern of the agent’s utility adjustments with respect to persistent shocks and its implications for compensation design.

Keywords: Dynamic contract; Persistent shock; Business cycle (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:71:y:2017:i:c:p:74-91

DOI: 10.1016/j.jmateco.2017.04.003

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