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On repeated moral hazard with discounting. (English) Zbl 0639.90013

Summary: We analyze optimal contracts in an infinitely repeated agency model in which both the principal and agent discount the future. We show that there is a stationary representation of the optimal contract when the agent’s conditional discounted expected utility is used as a state variable. This representation reduces the multi-period problem to a static variational problem which can be analyzed using standard variational techniques. This reduction is used to obtain several properties of the contract.

MSC:

91B38 Production theory, theory of the firm
93A13 Hierarchical systems