repeated moral hazard and contracts with memory the case of risk neutrality 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 agent can exert unobservable effort leading to success or failure incentives provided in the second period act as carrot and stick for the first period so that the effort level induced in the second period is higher after a first period 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 this article offers a new perspective on dynamic moral hazard problems consider a riskneutral principal who can hire a risk neutral but wealth constrained agent the agent can exert unobservable effort which increases the likelihood of success in the one shot problem there is a well known trade off between effort incentives and rent extraction which leads to a downward distorted effort level compared to the first best solution we extend the standard model by assuming that there is a second period in which the principal can make an investment to continue the project and the agent can again exert unobservable effort it turns out that there are several interesting insights that so far have escaped the literature on repeated moral hazard which was focused on the case of risk averse agents in particular if the principal can commit not to renegotiate the second period incentives can be used to partially circumvent the limited liability constraint in the second period the principal induces the agent to choose a particularly high effort level following a first period success and a particularly low effort level following a first period failure the prospect of a higher second period rent following a first period success motivates the agent to exert more effort in the first period i e rents in the second period act as reward and punishment for the first period it should be emphasized that we assume no technological impact of a first period success or failure on the second period technology nevertheless an optimal dynamic contract exhibits memory hence if an outsider observed today a principal agent pair that was successful and another identical pair that was not successful he would be right to predict that the first pair also is more likely to succeed tomorrow in other words a serial correlation across periods which we sometimes refer to as a hot hand effect is generated endogenously merely based on incentive considerations 2

contracting with wealth constrained agents we examine how a project owner optimally selects a project operator and motivates him to deliver an essential noncontractible input e g effort when potential operators are privately informed about their limited wealth truthful revelation of wealth is induced by promising a higher probability of operation and if necessary a greater share of realized profit the larger the nonrefundable bond that a potential operator posts the project owner benefits when total wealth is widely dispersed among potential operators under plausible conditions limited knowledge of wealth is not constraining for the project owner

tournaments with midterm reviews in many tournaments investments are made over time the question whether to conduct a review once at the end or additionally at points midway through the tournament is a strategic decision if the latter course is chosen then the designer must establish both a rule for aggregating the results of the different reviews and a rule for determining compensations we first study the case of a fixed exogenously given prize and then extend the analysis to the case where the prize is not fixed but may vary with the tournament s outcome it is shown that 1 it is always optimal to assign a higher weight to the final review 2 this weight increases with the dominance of the first stage effort in determining the final review s outcome when the prize is not fixed the optimal design generates an asymmetric tournament in the second stage that favors the winner of the midterm review

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

optimal incentives for sequential production processes i study optimal incentive schemes in organizations where agents perform their tasks sequentially i consider a model in which agents effort decisions are mapped into the probability of the project s success an optimal investment inducing mechanism allocates rewards to agents so as to induce all of them to exert effort in equilibrium at minimal cost to the principal i characterize the unique optimal mechanism in several versions of my benchmark model i also address the problem of allocating individuals with diverse qualifications to different slots of the production process as well as allocating tasks of different importance across different agents copyright 2006 rand

renegotiation and optimality in agency contracts we analyse renegotiation in a hidden action principal agent model contract renegotiation offers are made by the agent a refinement is imposed on the principal s beliefs if precisely one action is optimal with respect to both the principal s and the agent s contracts the principal believes that that action has been taken with the refinement imposed perfect bayesian equilibrium allocations are identical to the second best in the classical principal agent model without renegotiation when renegotiation is led by the agent and when equilibria satisfy the refinement equilibrium allocations are ex ante efficient incentive contracting is a common mechanism for promoting ex ante investments and for avoiding ex post opportunistic behaviour in a long term or continuing economic relationship the classical principal agent model holmstrom 1979 grossman and hart 1983 is a natural framework for this class of problem in such a model a risk averse agent performs an action on behalf of a risk neutral principal the agent s action is unobservable and affects the principal s revenue in a random fashion the derivation and characterization of efficient compensation schemes have been the major focus in the principal agent literature generally the incentives to motivate a costly action from the agent take the form of profit sharing the agent s reward is made contingent on his random performance outcomes

adverse selection in dynamic moral hazard this paper studies a multiperiod moral hazard problem under two assumptions i contracts are subject to renegotiations ii the agent s action has long term effects the action is also interpreted as a choice of characteristic or type renegotiation proof contracts that implement various actions including random ones are characterized under appropriate conditions the equilibrium involves the principal implementing a random action therefore the equilibrium has standard properties of adverse selection models

moral hazard and limited liability the real effects of contract bargaining abstract i examine the standard assumption in the moral hazard agency literature that the principal has all the bargaining power at the contract offer stage when the agent has limited liability as is often the case in practice the contract changes according to the distribution of bargaining power and consequently so does the agents effort implications of this result are examined

short term contracts and long term agency relationships abstract long term contracts are valuable only if optimal contracting requires commitment to a plan today that would not otherwise be adopted tomorrow we show that commitments are unnecessary and hence short term contracts are sufficient if 1 all public information can be used in contracting 2 the agent can acess a bank on equal terms with the principal 3 recontracting takes place with common knowledge about technology and preferences and 4 the frontier of expected utility payoffs generated by the set of incentive compatible contracts is downward sloping at all times

the trade creating effects of business and social networks evidence from france using theory grounded estimations of trade flow equations this paper investigates the role that business and social networks play in shaping trade between french regions the bilateral intensity of networks is quantified using the financial structure and location of french firms and bilateral stocks of migrants compared to a situation without networks migrants are shown to double bilateral trade flows while networks of firms multiply trade flows by as much as four in some specifications finally taking network effects into account divides the estimation of the impact of transport costs and of the effect of administrative borders by around three

repeated moral hazard the role of memory commitment and the access to credit markets abstract the dynamic dimension introduces new questions in moral hazard models thus the roles of memory and commitment have recently raised a marked interest the goal of this paper is to discuss and clarify the issues at hand and to present some new results we show that two conditions are necessary for the optimal long term contract to be implementable via spot contracts first the long term optimum should be renegotiation proof second spot contracts should provide efficient consumption smoothing we discuss how the availability of credit to the agent affects these two prerequisites we also study the hitherto neglected case in which the repetition of the moral hazard problem generates hidden information at recontracting dates the optimal renegotiation proof contract then implements the minimum effort level unless it involves randomized savings

contract renegotiation and coasian dynamics consider a long term relationship between a seller and a buyer whose valuation for a per period service or a durable good is private as trade progresses the valuation will be partially revealed and it may be impossible for the parties to commit ex ante not to take advantage of this we analyse this situation first by supposing that the parties can sign a sequence of short term contracts and secondly by supposing that they can sign a long term contract but cannot commit not to renegotiate it later we find a close relationship in the second case between the optimal long term contract and the non commitment outcome in the standard coasian durable good model our results also have implications for hidden information principal agent models

large risks limited liability and dynamic moral hazard we study a continuous time principal agent model in which a risk neutral agent with limited liability must exert unobservable effort to reduce the likelihood of large but relatively infrequent losses firm size can be decreased at no cost or increased subject to adjustment costs in the optimal contract investment takes place only if a long enough period of time elapses with no losses occurring then if good performance continues the agent is paid as soon as a loss occurs payments to the agent are suspended and so is investment if further losses occur accumulated bad performance leads to downsizing we derive explicit formulae for the dynamics of firm size and its asymptotic growth rate and we provide conditions under which firm size eventually goes to zero or grows without bounds

tie in sales and price discrimination this paper analyzes a class of contracts between buyers and sellers which specifies that the purchase of one good cannot be effectuated unless a second good is also purchased the economic forces resulting from a tie in are shown to be influenced by factors such as depreciation of the tying good the sales policy of the firm and the discount rate price discrimination the traditional hypothesis for this tie in is seen to make sense only when these factors align themselves in particular ways although an alternative hypothesis risk reduction is unaffected by these factors the price discrimination hypothesis therefore loses much of its appeal relative to the alternative

a theory of financing constraints and firm dynamics there is widespread evidence supporting the conjecture that borrowing constraints have important implications for firm growth and survival in this paper we model a multiperiod borrowing lending relationship with asymmetric information we show that borrowing constraints emerge as a feature of the optimal long term lending contract and that such constraints relax as the value of the borrower s claim to future cash flows increases we also show that the optimal contract has interesting implications for firm dynamics in agreement with the empirical evidence as age and size increase mean and variance of growth decrease and firm survival increases

long term short term and renegotiation on the value of commitment in contracting spot contracting generally involves efficiency losses relative to long term contracting it is proved here that short term contracting and renegotiation allow to achieve long run efficiency when transfers are not limited objectives are conflicting and no relevant asymmetric information appears at recontracting dates this last assumption excludes adverse selection but not moral hazard when technologies and preferences are time separable copyright 1990 by the econometric society

decentralization and collusion abstract we consider a model where agents work in sequence on a project share information not available to the principal and can collude due to limited liability the coase theorem does not apply the distribution of surplus among the agents is therefore an important control variable for the principal which gives us a theory of how to delegate in an organization subject to moral hazard the optimal distribution of surplus can always be achieved by delegating in the right way decentralization without using message games journal of economic literature classification numbers d23 d82 l14 l22

renegotiation of sales contracts this paper studies moral hazard contracts that may be renegotiated after an agent chooses an unobservable effort unlike in previous models a contract here contains only one compensation scheme and the agent has all the bargaining power in the renegotiation stage using a relatively weak forward induction refinement all equilibria are shown tb be second best efficient renegotiation occurs in every equilibrium if the effort set is rich the only equilibrium initial contract is a sales contract i e a scheme which sells the project to the agent this captures the idea that a party the principal who has an inherently weak renegotiation position will sometimes insist on a simple initial contract

when to fire a ceo optimal termination in dynamic contracts abstract existing models of dynamic contracts impose that it is both optimal and feasible for the contracting parties to bind themselves together forever this paper introduces optimal termination in dynamic contracts we modify the standard dynamic agency model to include an external labor market which upon the dissolution of the contract allows the firm to return to the labor market to seek a new match under this simple closure of the model two types of terminations emerge under one scenario the agent is fired after a bad output and he becomes too poor to be punished effectively under the second scenario the agent is forced out after a good output and he becomes too expensive to motivate

arm s length relationships we show that lowering the cost of acquisition of information that a principal obtains about the performance of an agent may make it more difficult for the principal to commit to threats hence it will weaken incentives and can therefore be counterproductive this phenomenon is explored in a framework where improving the quality of information makes a commitment not to renegotiate less credible applications to the theory of the firm are briefly explored

learning and incentive problems in repeated partnerships this paper analyzes optimal contracts for financing risky new projects in a two period agency model the principal and t he agent both learn about the project quality and the agent s unobservable actions affect the learning process the parties have access to the credit market compared to the short term contracts the long term contract induces the agent to work harder less hard in period one if his marginal effort in the first period increases reduces the value of information in both cases the long term contract enables the parties to learn more about the project type copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

renegotiating moral hazard contracts under limited liability and monotonicity in a principal agent model with unobservable effort and possible renegotiation contracts are assumed to satisfy two natural restrictions limited liability for the agent and monotonicity of payments for the principal the main result is that if the agent has the renegotiation bargaining power any contract is weakly pareto dominated by a debt contract journal of economic literature classification numbers d820 l140 o261

optimal incentives for teams much of the existing theory of incentives describes a static relationship that lasts for just one transaction this static assumption is not only unrealistic but the resulting predictions appear to be at odds with many work organizations the current paper introduces possible long term interaction among agents and studies how the design of explicit incentives and work organizations can exploit and interact with the implicit incentives generated by the repeated interaction of the agents the optimal incentive scheme is shown to display observed features of the increasingly popular teams such as the use of low powered group incentives