Moral Hazard and Persistence ∗

  title={Moral Hazard and Persistence ∗},
  author={Hugo Hopenhayn},
We study a multiperiod principal-agent problem with moral hazard in which effort is persistent: the agent is required to exert effort only in the initial period of the contract, and this effort determines the conditional distribution of output in the following periods. We provide a characterization of the optimal dynamic compensation scheme. As in a static moral hazard problem, consumption –regardless of time period– is ranked according to likelihood ratios of output histories. As in most… CONTINUE READING