Repeated Moral Hazard, Limited Liability, and Renegotiation

Patrick Schmitz and Susanne Ohlendorf
Authors registered in the RePEc Author Service: Susanne Goldlücke

No 6725, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We consider a repeated moral hazard problem, where both the principal and the wealth-constrained agent are risk-neutral. In each of two periods, the principal can make an investment and the agent can exert unobservable effort, leading to success or failure. Incentives in the second period act as carrot and stick for the first period, so that effort is higher after a success than after a failure. If renegotiation cannot be prevented, the principal may prefer a project with lower returns; i.e., a project may be "too good" to be financed or, similarly, an agent can be "overqualified."

Keywords: Dynamic moral hazard; Hidden actions; Limited liability (search for similar items in EconPapers)
JEL-codes: C73 D86 (search for similar items in EconPapers)
Date: 2008-02
New Economics Papers: this item is included in nep-cta, nep-gth and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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