Repeated Moral Hazard and Contracts with Memory: The Case of Risk‐Neutrality

20 Pages Posted: 23 May 2012

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: May 2012

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 agent can exert unobservable effort, leading to success or failure. Incentives provided in the second period act as carrot and stick for the first period, so that the effort level induced in the second period is higher after a first‐period 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.”

Suggested Citation

Ohlendorf, Susanne and Schmitz, Patrick W., Repeated Moral Hazard and Contracts with Memory: The Case of Risk‐Neutrality (May 2012). International Economic Review, Vol. 53, Issue 2, pp. 433-452, 2012. Available at SSRN: https://ssrn.com/abstract=2065128 or http://dx.doi.org/10.1111/j.1468-2354.2012.00687.x

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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