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- Title
REPEATED MORAL HAZARD.
- Authors
Rogerson, William P.
- Abstract
This paper considers a repeated principal agent relationship where the principal is risk neutral, the agent is risk averse, the principal can borrow or save at a fixed interest rate, and the agent discounts future consumption. It is shown that memory plays a very strong role in every Pareto-optimal contract. Sufficient conditions for Pareto-optimal contracts to exhibit rising or falling wages are identified. Finally, it is shown that the restriction of the agent's access to credit is necessary to achieve a Pareto-optimal outcome. In particular, under every Pareto-optimal contract for every outcome of every period the agent would choose to save some of his wage if he could.
- Subjects
INTEREST rates; WELFARE economics; INTEREST rate risk; RISK; PARETO optimum; CONSUMPTION (Economics); WAGES; SAVINGS; RISK aversion; UTILITY theory; FIXED interest rates
- Publication
Econometrica, 1985, Vol 53, Issue 1, p69
- ISSN
0012-9682
- Publication type
Article
- DOI
10.2307/1911724