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- Title
Repeated moral hazard with persistence.
- Authors
Mukoyama, Toshihiko; Şahin, Ayşegül
- 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.
- Subjects
MORAL hazard; PERSISTENCE (Economics); HUMAN capital; UNEMPLOYMENT insurance; WAGES
- Publication
Economic Theory, 2005, Vol 25, Issue 4, p831
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-004-0488-2