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Repeated Moral Hazard
William P. Rogerson
Vol. 53, No. 1 (Jan., 1985), pp. 69-76
Published by: The Econometric Society
Stable URL: http://www.jstor.org/stable/1911724
Page Count: 8
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This paper considers a repeated principal agent relationship where the principal is risk neutral, the agent is risk averse, the principal can borrow or save at a fixed interest rate, and the agent discounts future consumption. It is shown that memory plays a very strong role in every Pareto-optimal contract. Sufficient conditions for Pareto-optimal contracts to exhibit rising or falling wages are identified. Finally, it is shown that the restriction of the agent's access to credit is necessary to achieve a Pareto-optimal outcome. In particular, under every Pareto-optimal contract for every outcome of every period the agent would choose to save some of his wage if he could.
Econometrica © 1985 The Econometric Society