Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Jan, 1985, Volume 53, Issue 1

Repeated Moral Hazard<69:RMH>2.0.CO;2-Y
p. 69-76

William P. Rogerson

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.

Log In To View Full Content

Journal News