Repeated Moral Hazard, Limited Liability, and Renegotiation

28 Pages Posted: 11 Jun 2008

See all articles by Susanne Ohlendorf

Susanne Ohlendorf

affiliation not provided to SSRN

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

Date Written: February 2008

Abstract

We consider a repeated moral hazard problem, where both the principal and the wealth-constrained agent are risk-neutral. In each of two periods, the principal can make an investment and the agent can exert unobservable effort, leading to success or failure. Incentives in the second period act as carrot and stick for the first period, so that effort is higher after a success than after a failure. If renegotiation cannot be prevented, the principal may prefer a project with lower returns; i.e., a project may be "too good" to be financed or, similarly, an agent can be "overqualified."

Keywords: Dynamic moral hazard, hidden actions, limited liability

JEL Classification: C73, D86

Suggested Citation

Ohlendorf, Susanne and Schmitz, Patrick W., Repeated Moral Hazard, Limited Liability, and Renegotiation (February 2008). , Vol. , pp. -, 2008. Available at SSRN: https://ssrn.com/abstract=1141631

Susanne Ohlendorf (Contact Author)

affiliation not provided to SSRN

No Address Available

Patrick W. Schmitz

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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