Working Paper: CEPR ID: DP6857
Authors: Robin Mason; Juuso Vlimki
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. The principal pays only on completion of the project. 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.
Keywords: continuous time; moral hazard; principal-agent model; project completion
JEL Codes: C73; D82; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Principal's contract structure (M55) | Agent's wage decline (J31) |
| Principal's contract structure (M55) | Agent's value decline (L85) |
| Agent's wage decline (J31) | Agent's effort incentivization (J33) |
| Principal's patience relative to agent's patience (D15) | Agent's wage and effort convergence to zero (J31) |
| Principal's patience relative to agent's patience (D15) | Agent's wage and effort convergence to positive levels (J31) |