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Working paper

Динамическая модель морального риска с ограничениями участия, зависящими от предыстории

Morfov S. G.
This paper considers a moral hazard problem in an infinite-horizon, principal-agent framework. In the model, both the principal and the agent can commit only to short-term (single-period) contracts and their reservation utilities are allowed to depend on some finite truncation of the history of observables. After existence is proved, the original problem of obtaining the optimal incentive- compatible self-enforcing contract is given an equivalent recursive representation on a properly defined state space. I construct an auxiliary version of the problem where the participation of the principal is not guaranteed. The endogenous state space of agent’s expected discounted utilities which on a different dimension includes the set of truncated initial histories in order to account for their influence on the reservation utilities is proven to be the largest fixed point of a set operator. Then, the self-enforcing contract is shown to be recursively obtainable from the solution of the auxiliary problem by severely punishing any violation of the principal’s participation constraint.