The Curse of Long Horizons

V. Bhaskar () and George Mailath
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V. Bhaskar: Department of Economics, University of Texas at Austin

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

Abstract: We study dynamic moral hazard when the principal can only commit to spot contracts. Principal and agent are ex ante symmetrically uncertain about the difficulty of the job, and update their beliefs on observing output. Since the agent’s effort is private, he has an additional incentive to shirk when the principal induces effort: shirking results in the principal having incorrect beliefs, giving rise to future informational rents. 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: 48 pages
Date: 2016-07-24, Revised 2018-12-03
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Related works:
Journal Article: The curse of long horizons (2019)
Working Paper: The curse of long horizons (2016)
Working Paper: The Curse of Long Horizons (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:18-029

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