Working Paper: CEPR ID: DP8948
Authors: V. Bhaskar
Abstract: We study dynamic moral hazard, with symmetric ex ante uncertainty and learning. Unlike Holmstrom's career concerns model, uncertainty pertains to the difficulty of the job rather than the general talent of the agent, so that contracts are required to provide incentives. Since effort is privately chosen, the agent can always cause a misalignment of beliefs between the principal and himself, by shirking. We show that such a misalignment is always profitable for the agent, and must be dissuaded by providing more high powered incentives. However, high powered incentives in the future only aggravate the incentive problem today, so that the problem is compounded as the interaction becomes longer. We also study the benefits of long term contracts with full commitment, and the role of random effort choice.
Keywords: learning; moral hazard
JEL Codes: D83; D86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| misalignment of beliefs (D83) | higher agency costs (G39) |
| low effort (D29) | higher agency costs (G39) |
| high-powered incentives in future (M52) | exacerbate current incentive problems (D82) |
| current incentive problems (D43) | higher agency costs in future (G39) |
| long-term contracts (L14) | mitigate agency costs (G34) |
| long-term contracts under certain information structures (D86) | higher agency costs (G39) |
| random effort choices (D87) | alleviate agency costs (G34) |