IDEAS home Printed from https://ideas.repec.org/p/exe/wpaper/1314.html
   My bibliography  Save this paper

Dynamic Moral Hazard and Stopping

Author

Listed:
  • Robin Mason

    (Department of Economics, University of Exeter and CEPR.)

  • Juuso Välimäki

    (Aalto University School of Economics and HECER.)

Abstract

We analyse a simple model of dynamic moral hazard in which there is a clear and tractable trade-off between static and dynamic incentives. In our model, a principal wants an agent to complete a project. The agent undertakes unobservable effort, which affects in each period the probability that the project is completed. We characterise the contracts that the principal sets, with and without commitment. We show that with full commitment, the contract involves the agent’s value and wage declining over time, in order to give the agent incentives to exert effort. The long-run levels of the value and wage depend on the relative discount rates of the principal and agent. We also characterise the set of sequentially rational equilibria, where the principal has no commitment power.

Suggested Citation

  • Robin Mason & Juuso Välimäki, 2013. "Dynamic Moral Hazard and Stopping," Discussion Papers 1314, University of Exeter, Department of Economics.
    • Handle: RePEc:exe:wpaper:1314
    as

    Download full text from publisher

    File URL: https://exetereconomics.github.io/RePEc/dpapers/DP1314.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. James M. Malcomson & Frans Spinnewyn, 1988. "The Multiperiod Principal-Agent Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(3), pages 391-407.
    2. Shavell, Steven & Weiss, Laurence, 1979. "The Optimal Payment of Unemployment Insurance Benefits over Time," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1347-1362, December.
    3. Yuliy Sannikov, 2007. "Games with Imperfectly Observable Actions in Continuous Time," Econometrica, Econometric Society, vol. 75(5), pages 1285-1329, September.
    4. Kamihigashi, Takashi, 2001. "Necessity of Transversality Conditions for Infinite Horizon Problems," Econometrica, Econometric Society, vol. 69(4), pages 995-1012, July.
    5. Stephen E. Spear & Sanjay Srivastava, 1987. "On Repeated Moral Hazard with Discounting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(4), pages 599-617.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mason, Robin & Välimäki, Juuso, 2008. "Dynamic Moral Hazard and Project Completion," CEPR Discussion Papers 6857, C.E.P.R. Discussion Papers.
    2. Nicola Pavoni & G. L. Violante, 2007. "Optimal Welfare-to-Work Programs," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(1), pages 283-318.
    3. Tobias Laun, 2020. "Optimal Social Insurance with Endogenous Health," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(2), pages 464-493, April.
    4. Alvarez-Parra, Fernando A. & Sanchez, Juan M., 2006. "Unemployment Insurance in an Economy with a Hidden Labor Market," MPRA Paper 2531, University Library of Munich, Germany.
    5. Robert Shimer & Ivan Werning, 2008. "Liquidity and Insurance for the Unemployed," American Economic Review, American Economic Association, vol. 98(5), pages 1922-1942, December.
    6. Huang, Pidong, 2013. "Optimal Unemployment Insurance With Different Types of Job," MPRA Paper 46626, University Library of Munich, Germany.
    7. ,, 2015. "Unraveling in a repeated moral hazard model with multiple agents," Theoretical Economics, Econometric Society, vol. 10(1), January.
    8. Sebastien Menard, 2021. "Optimal sickness benefits in a principal–agent model," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 57(1), pages 5-33, July.
    9. Nadide Banu Olcay, 2016. "Dynamic incentive contracts with termination threats," Review of Economic Design, Springer;Society for Economic Design, vol. 20(4), pages 255-288, December.
    10. Hairault, Jean-Olivier & Langot, François & Ménard, Sébastien & Sopraseuth, Thepthida, 2012. "Optimal unemployment insurance for older workers," Journal of Public Economics, Elsevier, vol. 96(5), pages 509-519.
    11. Wang, Cheng & Williamson, Stephen D., 2002. "Moral hazard, optimal unemployment insurance, and experience rating," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1337-1371, October.
    12. Krueger, Dirk & Uhlig, Harald, 2006. "Competitive risk sharing contracts with one-sided commitment," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1661-1691, October.
    13. Yılmaz, Murat, 2015. "Contracting with a naïve time-inconsistent agent: To exploit or not to exploit?," Mathematical Social Sciences, Elsevier, vol. 77(C), pages 46-51.
    14. Wang, Cheng & Williamson, Stephen, 1996. "Unemployment insurance with moral hazard in a dynamic economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 1-41, June.
    15. Karaivanov, Alexander K. & Martin, Fernando M., 2018. "Markov-perfect risk sharing, moral hazard and limited commitment," Journal of Economic Dynamics and Control, Elsevier, vol. 94(C), pages 1-23.
    16. Hagedorn, Marcus & Kaul, Ashok & Mennel, Tim, 2010. "An adverse selection model of optimal unemployment insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 490-502, March.
    17. Spinnewijn, Johannes, 2013. "Training and search during unemployment," Journal of Public Economics, Elsevier, vol. 99(C), pages 49-65.
    18. Long, Iain W. & Polito, Vito, 2014. "Unemployment, Crime and Social Insurance," Cardiff Economics Working Papers E2014/9, Cardiff University, Cardiff Business School, Economics Section.
    19. Pavoni, Nicola & Setty, Ofer & Violante, Giovanni L., 2010. "Search and Work in Optimal Welfare Programs," Foerder Institute for Economic Research Working Papers 275749, Tel-Aviv University > Foerder Institute for Economic Research.
    20. Álvarez-Parra, Fernando & Sánchez, Juan M., 2009. "Unemployment insurance with a hidden labor market," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 954-967, October.

    More about this item

    Keywords

    Principal-agent model; continuous time; moral hazard; project completion.;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:exe:wpaper:1314. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sebastian Kripfganz (email available below). General contact details of provider: https://edirc.repec.org/data/deexeuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.