The Curse of Long Horizons

V Bhaskar and George Mailath

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We study dynamic moral hazard with symmetric ex ante uncertainty about the difficulty of the job. The principal and agent update their beliefs about the difficulty as they observe output. Effort is private and the principal can only offer spot contracts. The agent has an additional incentive to shirk beyond the disutility of effort when the principal induces effort: shirking results in the principal having incorrect beliefs. We show that the effort inducing contract must provide increasingly high powered incentives as the length of the relationship increases. Thus it is never optimal to always induce effort in very long relationships.

Keywords: principal-agency; moral hazard; differences in beliefs; high-powered incentives (search for similar items in EconPapers)
JEL-codes: D01 D23 D86 J30 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2016-07-24, Revised 2016-07-24
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The curse of long horizons (2019)
Working Paper: The Curse of Long Horizons (2018)
Working Paper: The curse of long horizons (2016)
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