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Pedro Hemsley
 
''Short-run immiseration in repeated moral hazard''
( 2016, Vol. 36 No.3 )
 
 
In standard models of infinitely-repeated moral hazard with risk aversion, the agent´s continuation value from the relationship with the principal decreases non-monotonically over time and diverges to minus infinity almost surely, meaning that the agent gets most of the compensation in the early stages of the relationship and is left with little to receive in the future. In the short run, however, this pattern is less clear as continuation values may drift up as a response to good outcomes. I provide conditions under which the drift upwards is small and the probability of increased continuation values is very low even for short periods. Hence the immiseration result, an asymptotic property, is a good approximation in the short run.
 
 
Keywords: Contract theory, repeated moral hazard, immiseration result
JEL: D8 - Information, Knowledge, and Uncertainty: General
L2 - Firm Objectives, Organization, and Behavior: General
 
Manuscript Received : Feb 03 2016 Manuscript Accepted : Aug 03 2016

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