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Repeated moral hazard with a time-inconsistent agent

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  • Yılmaz, Murat

Abstract

I consider a repeated principal-agent model with moral hazard, in which the agent has βδ-preferences, which are widely used to capture time-inconsistency. I analyze the case where the agent is sophisticated in the sense that he is fully aware of his inconsistent discounting. I characterize the optimal wage scheme for such an agent and compare it to time-consistent benchmarks. The marginal cost of rewarding the agent for high output today exceeds the marginal benefit of delaying these rewards until tomorrow. In this sense, the principal does not smooth the agent's rewards over time. When facing a sophisticated agent, it is optimal for the principal to reward the good performance more and punish the bad performance more in the early period, relative to the optimal wage scheme for a time-consistent agent.

Suggested Citation

  • Yılmaz, Murat, 2013. "Repeated moral hazard with a time-inconsistent agent," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 70-89.
    • Handle: RePEc:eee:jeborg:v:95:y:2013:i:c:p:70-89
    DOI: 10.1016/j.jebo.2013.08.010
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    Cited by:

    1. Hiller, Victor, 2018. "Self-control and the rise and fall of factory discipline," Journal of Development Economics, Elsevier, vol. 133(C), pages 187-200.
    2. Bernes Karaçay & Murat Yýmaz, 2016. "A Dynamic Investment Model under Time-Inconsistency," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 30(1), pages 23-49.
    3. Woźny Łukasz, 2016. "On the Price of Commitment Assets in a General Equilibrium Model with Credit Constraints and Tempted Consumers," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 16(2), pages 579-598, June.
    4. Weinschenk, Philipp, 2021. "On the benefits of time-inconsistent preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 182(C), pages 185-195.
    5. Lukasz Wozny & Michal Krawczyk, 2016. "An experiment on temptation and attitude towards paternalism," KAE Working Papers 2016-018, Warsaw School of Economics, Collegium of Economic Analysis.
    6. Murat Yilmaz, 2018. "An Extended Survey of Time-Inconsistency and Its Applications," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 32(1), pages 55-73.
    7. Woźny, Łukasz, 2015. "On incentives, temptation and self-control," Mathematical Social Sciences, Elsevier, vol. 74(C), pages 60-67.
    8. Minwook Kang, 2015. "Welfare criteria for quasi-hyperbolic time preferences," Economics Bulletin, AccessEcon, vol. 35(4), pages 2506-2511.
    9. Minwook Kang, 2019. "Pareto-improving tax policies under hyperbolic discounting," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(3), pages 618-660, June.
    10. Fahn, Matthias & Seibel, Regina, 2022. "Present bias in the labor market – when it pays to be naive," Games and Economic Behavior, Elsevier, vol. 135(C), pages 144-167.
    11. Lukasz Wozny, 2016. "Repeated moral hazard with costly self-control," KAE Working Papers 2016-017, Warsaw School of Economics, Collegium of Economic Analysis.

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    More about this item

    Keywords

    Repeated moral hazard; Time-inconsistency; βδ-Preferences; Sophisticated agent; Naive agent;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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