Title: Repeated Moral Hazard, Limited Liability, and Renegotiation
Abstract: We consider a repeated moral hazard problem, where both the principal and the wealth-constrained agent are risk-neutral. In each of two periods, the principal can make an investment and the agent can exert unobservable effort, leading to success or failure. Incentives in the second period act as carrot and stick for the first period, so that effort is higher after a success than after a failure. If renegotiation cannot be prevented, the principal may prefer a project with lower returns; i.e., a project may be too good to be financed or, similarly, an agent can be overqualified.
Publication Year: 2008
Publication Date: 2008-02-01
Language: en
Type: preprint
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Cited By Count: 7
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