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Impatience vs. incentives

Author

Listed:
  • John Zhu

    (Wharton)

  • Marcus Opp

    (UC Berkeley, Haas School of Business)

Abstract

This paper studies the long-run dynamics of Pareto-optimal self-enforcing contracts in a repeated principal-agent framework with differential discounting. Impatience concerns encourage contracts to favor the more patient player in the long run, and incentives concerns encourage contracts to favor the agent in the long run. When the agent is relatively impatient, the impatience and incentives forces are in conflict. If the conflict is strong, we show that optimal contracts oscillate between favoring the principal and favoring the agent as a way to cater to both forces in the long-run. This occurs in the absence of uncertainty or any need to randomize. When the impatience and incentives forces are aligned or one force dominates the other, we show that every optimal contract converges to a steady state in the long run in a well-behaved way. The results of Ray (2002) and Lehrer and Pauzner (1999) can be recovered as limiting cases.

Suggested Citation

  • John Zhu & Marcus Opp, 2014. "Impatience vs. incentives," 2014 Meeting Papers 125, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:125
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