Repeated moral hazard with persistence

Toshihiko Mukoyama and Aysegul Sahin

Economic Theory, 2005, vol. 25, issue 4, 854 pages

Abstract: This paper considers the optimal contract when the current (hidden) action of an agent has a persistent effect on the future outcome. The optimal contract in a two-effort choice, two-period setting is characterized analytically and numerically. In particular, we show that persistence tends to make compensation less responsive to the first-period outcome. At the extreme, there are cases where the agent is perfectly insured against the first-period outcome: the agent obtains the same utility regardless of the first-period outcome. The model is extended to three periods. We also present a computational method to characterize an N-period model with two-period persistence. Copyright Springer-Verlag Berlin/Heidelberg 2005

Keywords: Repeated moral hazard; Persistence; Human capital; Unemployment insurance. (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (21)

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Working Paper: Repeated Moral Hazard with Persistence (2004)
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DOI: 10.1007/s00199-004-0488-2

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