wall street occupations many finance jobs entail the risk of large losses and hard to monitor effort we analyze the equilibrium consequences of these features in a model with optimal dynamic contracting we show that finance jobs feature high compensation up or out promotion and long work hours and are more attractive than other jobs moral hazard problems are exacerbated in booms even though pay increases employees whose talent would be more valuable elsewhere can be lured into finance jobs while the most talented employees might be unable to land these jobs because they are too hard to manage

optimal incentive contracts for knowledge workers we study optimal incentive provision for knowledge workers a crucial resource for many organizations we augment a standard moral hazard framework to reflect two key patterns first retention is a challenge because workers are free to leave thereby harming their employer second the value of the workeru 05f3s outside option might depend on effort on the job optimal contracts that retain workers exhibit properties such as first best effort and surplus or non responsiveness to changes in underlying conditions due to large rents full retention is however costly for employers hence even when socially inefficient separation might occur in equilibrium 2014 elsevier b v

termination of dynamic contracts in an equilibrium labor market model i construct an equilibrium model of the labor market where workers and firms enter into dynamic contracts that can potentially last forever but are subject to optimal terminations upon a termination the firm hires a new worker and the worker who is terminated receives a termination contract from the firm and is then free to go back to the labor market to seek new employment opportunities and enter into new dynamic contracts the model permits only two types of equilibrium terminations that resemble respectively the two kinds of labor market separations that are typically observed in practice involuntary layos and voluntary retirements the model allows simultaneous determination of its equilibrium turnover unemployment and retirement as well as the expected utility of the new labor market entrants

stock grants as a commitment device abstract a large and increasing fraction of the value of executives compensation is accounted for by security grants however in most models of executive compensation the optimal allocation can be implemented through a sequence of state contingent cash payments security awards are redundant in this paper we develop a dynamic model of managerial compensation where neither the firm nor the manager can commit to long term contracts we show that in this environment if stock grants are not used then the optimal contract collapses to a series of short term contracts when stock grants are used however nonlinear intertemporal schemes can be implemented to achieve better risk sharing and higher firm value

computing multi period information constrained optima this paper presents a detailed theoretical derivation and justification for methods used to compute solutions to a multi period including infinite period continuum agent unobservedeffort economy actual solutions are displayed illustrating cross sectional variability in consumption and labour effort in the population at a point in time and variability for a typical individual over time the optimal tradeoff between insurance and incentives is explored and the issue of excess variability is addressed by consideration of the analogue full information economy and various restricted contracting regimes

aggregate consequences of limited contract enforceability we study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts because of enforceability problems contracts are constrained efficient we show that limited enforceability amplifies the impact of technological innovations on aggregate output this implies that economies with lower enforceability of contracts are characterized by greater macroeconomic volatility a key assumption for the amplification result is that defaulting entrepreneurs are not excluded from the market

a recursive formulation for repeated agency with history dependence abstract we present general recursive methods to handle environments where privately observed variables are linked over time we show that incentive compatible contracts are implemented recursively with a threat keeping constraint in addition to the usual temporary incentive compatibility and promise keeping conditions journal of economic literature classification numbers d30 d31 d80 d82

markov perfect risk sharing moral hazard and limited commitment abstract we define characterize and compute markov perfect risk sharing contracts in a dynamic stochastic economy with endogenous asset accumulation and simultaneous limited commitment and moral hazard frictions we prove that markov perfect insurance contracts preserve standard properties of optimal insurance with private information and are not more restrictive than a long term contract with one sided commitment markov perfect contracts imply a determinate asset time path and a non degenerate long run stationary wealth distribution quantitatively we show that markov perfect risk sharing contracts provide sizably more consumption smoothing relative to self insurance and that the welfare gains from resolving the commitment friction are larger than the gains from resolving the moral hazard friction at low asset levels while the opposite holds for high asset levels

repeated moral hazard with effort persistence abstract i study a problem of repeated moral hazard where the effect of effort is persistent over time each period s outcome distribution is a function of a geometrically distributed lag of past efforts i show that when the utility of the agent is linear in effort a simple rearrangement of terms in his lifetime utility translates this problem into a related standard repeated moral hazard the solutions for consumption in the two problems are observationally equivalent implying that the main properties of the optimal contract remain unchanged with persistence for illustration i present the computed solution of an example

capital flows under moral hazard abstract i analyze a model with moral hazard and limited enforcement in a small open economy i find that when state contingent contracting is allowed adding the moral hazard friction improves the model s predictions along several dimensions first it justifies why non contingent debt is an optimal way to finance an emerging economy second it explains the limited consumption risk sharing and high volatile and counter cyclical interest rates third it generates realistic crisis like dynamics in which capital inflows are brought to a halt and interest rates sky rocket the model also has a strong internal propagation mechanism limited enforcement friction alone or together with moral hazard has nearly no effect on the model s performance i also construct a simple empirical test to distinguish between the two frictions and it favors moral hazard over limited enforcement friction

market based incentives we study optimal incentives in a principal agent problem in which the agent s outside option is determined endogenously in a competitive labor market in equilibrium strong performance increases the agent s market value when this value becomes sufficiently high the threat of the agent s quitting forces the principal to give the agent a raise the prospect of obtaining this raise gives the agent an incentive to exert effort which reduces the need for standard incentives like bonuses in fact whenever the agent s option to quit is close to being in the money the market induced incentive completely eliminates the need for standard incentives

asset prices debt constraints and inefficiency abstract we consider possibly non stationary economies with endogenous solvency constraints under uncertainty over an infinite horizon as in alvarez and jermann 2000 5 a sort of cass criterion cass 1972 10 completely characterizes constrained inefficiency under the hypothesis of uniform gains from risk sharing which is always satisfied in stationary economies when the autarchy is constrained inefficient uniform gains from risk sharing also guarantee a finite value of the intertemporal aggregate endowment at a constrained optimum hence no equilibrium exhibits a null interest rate in the long run finally constrained inefficiency occurs if and only if there exists a feasible redistribution producing a welfare improvement at all contingencies

unemployment insurance with a hidden labor market abstract we consider the problem of optimal unemployment insurance ui in a repeated moral hazard framework unlike existing literature unemployed individuals can secretly participate in a hidden labor market this extension modifies the standard problem in three dimensions first it imposes an endogenous lower bound for the lifetime utility that a contract can deliver second it breaks the identity between unemployment payments and consumption and third it hardens the encouragement of search effort the optimal unemployment insurance system in an economy with a hidden labor market is simple with an initial phase in which payments are relatively flat during unemployment and with no payments for long term unemployed individuals this scheme differs substantially from the one prescribed without a hidden labor market and resembles unemployment protection programs in many countries

economic segmentation worker power and income inequality how economic segmentation generates income inequality constitutes a central question for theories of economic and social organization and of socioeconomic achievement previous research emphasizes two sources of the structural variation in income 1 employers with large amounts of resources for a variety of reasons may find it in their interests to pay workers higher wages and 2 some workers are able to acquire power against their employers as well as against other workers and can therefore extract higher earnings in this paper we investigate several issues involved in the links among economic segmentation worker power and income inequality we argue that the structure of economic segmentation is multidimensional and reflects such distinct concepts as concentration economic scale state intervention in the market capital intensity and organization size worker power also is derived from diverse sources such as union membership occupational skill and licensing class position and tenure wi

a total eclipse of the heart compensation strategies in entrepreneurial nonprofits abstract we examine how shifting resource dependencies influence compensation strategy during commercial transitions within entrepreneurial nonprofits analyzing a longitudinal sample of 4732 organizations we show how compensation strategies shift non linearly as nonprofits transition from contributed resource dependence to market based resource dependence dynamic quadratic models unveil a dual threshold of commercialization concerning this transition nonprofits at moderate stages of commercialization contend with competing dependencies from both contributed and market based sources resulting in a decrease in compensation spending and an increase in part time employment at higher stages contributed resource dependence is eclipsed by market based dependence reflected in increasing compensation spending and full time employment

opportunity and social mobility the fact that the children of rich parents have better economic prospects than the children of poor parents unequal opportunity is generally thought to be one of the weak points of modem capitalist societies the ability of the descendants of poor families to eventually become rich and the descendants of rich families to eventually become poor social mobility is commonly considered to be one of the strong points of these societies here i argue that both of these characteristics are in fact necessary implications of an efficient societal arrangement when incentives to work hard must be provided i argue this point using a generational version of the model of phelan and townsend 1991 an infinitely repeated general equilibrium economy with incentive constraints in my model each household s stochastic output is a function of its level of effort since effort is assumed to be costly and privately observed households can shirk higher than minimal effort levels must be induced by making a household s present or future consumption dependent on the household s observed output history a large literature considers models similar to this including green 1987 atkeson and lucas 1992 phelan 1994 1995 wang 1995 hopenhayn and nicolini 1997 khan and ravikumar 2002 the main difference between the economies in that literature and here is that here instead of a household consisting of a single infinitely lived individual a household consists of a sequence of altruistically linked individuals a familial dynasty each of whom lives for one period this difference affects the appropriate societal ranking of allocations when households consist of a single infinitely lived individual allocations can be ranked according to their implied distributions of ex ante lifetime utilities if one allocation delivers a distribution of ex ante utilities dominated by another allocation then the first allocation is inefficient however if a household consists of a sequence of altruistically linked individuals then the appropriate ranking of allocations is no longer obvious how those in the first generation rank allocations will in general differ from how their descendants rank allocations this paper addresses this conflict between generations by ranking allocations according to a rawlsian veil of ignorance criterion rawls 1971 that is here society seeks to maximize the expected dynastic utility utility including altruism toward descendants of an individual who does not know into which generation he will be born and the identity or output levels of his ancestors 1 i argue that this corresponds to a societal ranking which does

dynamic risk sharing with two sided moral hazard abstract a group of risk averse agents repeatedly produce a perishable consumption good individual outputs are observable but efforts are not the contracting problem admits a recursive formulation and the optimal value function is the fixed point of a contraction mapping when the agents can be punished to the full extent in a single period every continuation contract of an optimal contract is itself optimal the marginal utility ratio between one agent and another is a submartingale the results imply that it is in general important to restrict an agent whose moral hazard constraint is binding from saving through another agent within the risk sharing group limited commitment and long run implications of optimal contracting are also 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

optimal self enforcement and termination abstract we study a principal agent problem where the agent receives a stochastic outside opportunity offer each period and he cannot commit to the ongoing contractual relationship termination which is costly allows the principal to go back to an external market to hire a new agent the principal responds strategically to the agent s outside offers choosing optimally between retaining the agent which must be self enforced and terminating him which then ends the current contract the model generates both voluntary and involuntary terminations and dynamics and stationarity outcomes that are of interest especially for understanding employment relationships with on the job search

optimal unemployment insurance with human capital depreciation and duration dependence this paper studies the effect of human capital depreciation and duration dependence on the design of an optimal unemployment insurance ui scheme our results partially confirm those obtained in most previous studies benefits should decrease with unemployment duration the optimal program also generates two main novel features which are not present in stationary models first if human capital depreciates rapidly enough during unemployment ui transfers are bounded below by a minimal assistance level that arises endogenously in the efficient program second we study the optimality of imposing a history contingent wage tax after reemployment our numerical simulations based on the spanish and us economies show that the wage tax should decrease with the length of worker s previous unemployment spell and become a wage subsidy for long term unemployed workers as a by product of our study we develop a systematic approach suitable for studying recursively a wide range of dynamic moral hazard problems and other models with similar characteristics

payments systems design in deterministic and private information environments abstract the first setup we study is a deterministic model with spatial separation where we consider alternative payments systems institutions and their implications for allocation and welfare a payments system with period by period settlement in outside money improves on decentralized exchange an efficient allocation is supported by a payments system where settlement is not imposed in the second model there is random matching and unobserved productivity shocks and preference shocks we explore how risk should be shared optimally in this economy and interpret the results in terms of how actual payments systems should operate journal of economic literature classification numbers e4 e5

a dynamic model of unsecured credit abstract we study the terms of credit in a competitive market in which sellers lenders are willing to repeatedly finance the purchases of buyers borrowers by engaging in a credit relationship the key frictions are i the lender cannot observe the borrower s ability to repay a loan ii the borrower cannot commit to any long term contract iii it is costly for the lender to contact a borrower and to walk away from a contract and iv transactions within each credit relationship are not publicly observable the lender s optimal contract has two key properties delayed settlement and debt forgiveness finally we study the impact of changes in the initial cost of lending on the contract terms

why some jobs command wage premiums a test of career tournament and internal labor market hypotheses the wage premiums associated with jobs in a large organization were identified through comparing their pay to the prevailing wages in the relevant outside labor markets we then examined the characteristics of those jobs to investigate why some commanded larger premiums than others jobs at the tops of promotion ladders jobs requiring many organization specific skills and to a lesser extent jobs with access to influence commanded greater wage premiums wages above market rates appear important in supporting the internal labor market mechanisms associated with these jobs findings may clarify the factors compensation managers should consider when positioning wage rates examination of these issues is a potentially important bridge between the study of internal labor markets in organizational research and the study of wages in economics

money and dynamic credit arrangements with private information abstract we construct a model with private information in which consumers write dynamic contracts with financial intermediaries a role for money arises due to random limited participation of consumers in the financial market without defection constraints a friedman rule is optimal the mean and variability of wealth tend to fall with inflation in the steady state and the welfare effects of inflation are very small with defection constraints the effects of inflation on the distribution of welfare and consumption are large but the effect on average welfare is still small the relaxation of defection constraints resulting from higher inflation can cause a substantial increase in the real interest rate journal of economic literature classification numbers d8 e4 g2

dynamic optimal taxation with private information we study dynamic optimal taxation in a class of economies with private information optimal allocations in these environments are complicated and history dependent yet we show that they can be implemented as competitive equilibria in market economies supplemented with simple tax systems the market structure in these economies is similar to that in bewley 1986 agents supply labour and trade risk free claims to future consumption subject to a budget constraint and a debt limit optimal taxes are conditioned only on two observable characteristics an agent s accumulated stock of claims or wealth and her current labour income we show that optimal taxes are generally non linear and non separable in these variables and relate the structure of marginal wealth and income taxation to the properties of agent preferences this paper studies optimal taxation in a class of dynamic economies with private information we consider an environment in which agents preferences are defined over consumption and labour and each agent receives a privately observed sequence of i i d preference shocks incentivecompatibility constraints stemming from private information imply that socially optimal or constrained efficient allocations in this environment are complicated and history dependent yet we show that they can be implemented as competitive equilibria in market economies supplemented with simple tax systems the market structure in these economies is identical to that in bewley 1986 huggett 1993 or aiyagari 1994 agents can trade current consumption for claims to future consumption subject to a budget constraint and a borrowing limit these claims have a non contingent pre tax return crucially taxes are conditioned upon only two observable characteristics of an agent current wealth given by the agent s accumulated stock of claims and current labour income they do not depend on any other aspect of an agent s past history most models of dynamic optimal taxation follow the ramsey approach in which the set of fiscal instruments available to the government is exogenously specified 1 linear labour and capital income taxes are typically included in this set while lump sum taxes are ruled out the exclusion of the latter is justified by appealing to incentive or administrative constraints but these are not explicitly modelled these exogenous restrictions on fiscal instruments represent frictions that the government seeks to ameliorate through its optimal choice of tax rates the approach we adopt in this paper builds on the optimal taxation literature initiated by mirrlees 1971 mirrlees assumes that agents receive privately observed shocks to their

policy redesign for solving the financial bottleneck in demand side management dsm in china abstract dsm is one of the best and most practical policy tools for china to balance environmental protection and economic growth however the bottleneck lies in the lack of long term stable sufficient and gradually increasing funds to flow into dsm projects the author redesigns the practical system benefit charge sbc policy which will provide long term and stable funding for dsm the policy to facilitate the financial support from banking sector and capital market and investigates the possibility of dsm funding from cdm projects sbc is the best way to boost long term stable and sufficient funding for dsm at present in china the current low inflation rate and natural resource price are favored to expedite the implementation of sbc and dsm developments with regard to the uneven development china needs to design relative policies to offset the impact in different areas such as tax reduction and fiscal subsides it is time for china to develop a definite and clear target and timetable to implement dsm which will give the public and enterprises a definite and clear expectation for the future the government should publicize a clear and integrated dsm development plan and relative policy outline in the near medium and long term

understanding organizational wage structures a resource dependence approach data on the salaries for high level administrative positions in 608 colleges and universities were used to examine the relative salaries for six positions controlling for other factors we found t

on efficient distribution with private information this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers each of whom is subject to private idiosyncratic taste shocks we propose a recursive method for finding feasible allocations that are incentivecompatible and that are pareto optimal within this set the method is applied to several parametric examples we find that in an efficient allocation the degree of inequality continually increases with a diminishing fraction of the population receiving an increasing fraction of the resources we discuss the extent to which these allocations can be decentralized via market arrangements this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with private information the economy we study has a constant endowment flow of a single non storable consumption good which is to be allocated each period among a large number of consumers each period these consumers experience unpredictable idiosyncratic privately observed taste shocks affecting their marginal utility of current consumption efficiency dictates that more resources be allocated to those consumers who in any given period have a high marginal utility of current consumption

dynamic microlending under adverse selection can it rival group lending we derive an optimal lending contract in a two period adverse selection model with limited commitment on the borrower side the contract involves penalty interest rates after default and favorable rates after success under some conditions it also charges first time borrowers higher rates than repeat borrowers as in relationship lending because the lender is constrained to keep borrowing attractive while using revealed information to price for risk we compare the efficiency of a group lending contract of the kind popularized by the microcredit movement to the dynamic individual contract both types of contracts reveal the same information but the contracts face different constraints on using the information to improve risk pricing as a result either type of contract can lead to greater efficiency depending on specifics of the environment opening the possibility that dynamic lending has played a role comparable to that of group lending in the success of microcredit we also characterize the optimal dynamic group contract when both lending techniques are feasible and find that it combines both approaches but with varying emphases a recurrent theme is that in more marginal environments dynamic lending performs relatively better than and is prioritized over group lending we also discuss a number of extensions including spatially and serially correlated risk and the effect of competition

optimal lending contracts and firm dynamics we develop a general model of lending in the presence of endogenous borrowing constraints borrowing constraints arise because borrowers face limited liability and debt repayment cannot be perfectly enforced in the model the dynamics of debt are closely linked with the dynamics of borrowing constraints in fact borrowing constraints must satisfy a dynamic consistency requirement the value of outstanding debt restricts current access to short term capital but is itself determined by future access to credit this dynamic consistency is not guaranteed in models of exogenous borrowing constraints where the ability to raise short term capital is limited by some prespecified function of debt we characterize the optimal default free contract which minimizes borrowing constraints at all histories and derive implications for firm growth survival leverage and debt maturity the model is qualitatively consistent with stylized facts on the growth and survival of firms comparative statics with respect to technology and default constraints are derived borrowing constraints are an important determinant of firm growth and survival 1 such constraints may arise in connection to the financing of investment opportunities faced by firms or temporary liquidity needs such as those required to survive a recession this paper develops a theory of endogenous borrowing constraints and studies its implications for firm dynamics in our model debt is constrained by the firm s limited liability and option to default a lending contract specifies an initial loan size future financing and a repayment schedule the choice of these variables in turn determines future growth the firm s future borrowing capacity and its ability and willingness to repay hence borrowing constraints and firm dynamics are jointly determined we study this dynamic design problem our model builds on thomas and worral s 1994 model of foreign direct investment at time zero a risk neutral borrower firm or entrepreneur has a project which requires a fixed initial set up cost every period the project yields revenues that increase with the amount of 1 there is considerable evidence suggesting that financing constraints are important determinants of firm dynamics gertler and gilchrist 1994 argue that liquidity constraints may explain why small manufacturing firms respond more to a tightening of monetary policy than do larger manufacturing firms perez quiros and timmermann 2000 show that in recessions smaller firms are more sensitive to the worsening of credit market conditions as measured by higher interest rates and default premia evans and jovanovic 1989 show that the liquidity constraints are essential in the decision to become an entrepreneur fazzari hubbard and petersen 1988 among others view financial constraints as an explanation for the dynamic behaviour of aggregate investment and cabral and mata 1996 are able to fit reasonably well the size distribution of portuguese manufacturing firms by estimating a simple model of financing constraints for surveys see hubbard 1998 and stein 2003

outside opportunities and termination abstract we study a dynamic principal agent relationship where a stochastic outside opportunity offer arises each period for the risk averse agent termination is costly but it allows the agent to pursue the available outside opportunity and the principal to return to an external market to hire a new agent the principal acts strategically with respect to the agent s outside offers and we show that it is optimal to terminate the current relationship if and only if the agent s outside offer is above a cutoff level the optimal contract generates both voluntary and involuntary terminations severance compensation arises endogenously and we show that it may be paid only in involuntary terminations conditional on termination the size of the optimal severance compensation depends positively on the agent s current compensation but negatively on his outside offer the optimal contract dictates an inverted u relationship between compensation and the probability of termination

the composition of international capital flows risk sharing through foreign direct investment abstract evidence on international capital flows suggests that foreign direct investment fdi is less volatile than other financial flows to explain this finding i model international capital flows under the assumptions of imperfect enforcement of financial contracts and inalienability of fdi imperfect enforcement of contracts leads to endogenous financing constraints and the pricing of default risk inalienability implies that it is not as advantageous to expropriate fdi relative to other flows these features combine to give a risk sharing advantage to fdi over other capital flows this risk sharing advantage of fdi translates into a lower default premium and lower sensitivity to changes in a country s financing constraint the model offers the new implication that financially constrained countries should borrow relatively more through fdi this is because fdi is harder to expropriate and not because fdi is more productive or less volatile using several creditworthiness and country risk ratings to measure financing constraints i present new evidence linking fdi and financing constraints moreover numerical simulations of the model generate stronger serial correlation for fdi than for other flows into developing countries this corroborates the view that non fdi flows are more short term and more likely to change direction

efficient allocations with hidden income and hidden storage we consider an environment in which individuals receive income shocks that are unobservable to others and can privately store resources we provide a simple characterization of the unique efficient allocation of consumption in cases in which the rate of return on storage is sufficiently high or alternatively in which the worst possible outcome is sufficiently dire we show that unlike in environments without unobservable storage the symmetric efficient allocation of consumption is decentralizable through a competitive asset market in which individuals trade riskfree bonds among themselves in this paper we consider an environment in which individuals have random income and can accumulate assets through a storage technology their income realizations and their asset position are private information given these informational frictions we provide a simple characterization of the unique efficient allocation of consumption in cases in which the rate of return on storage is sufficiently high or alternatively in which the worst possible outcome is sufficiently dire we show that the symmetric efficient allocation of consumption is decentralizable through a competitive asset market in which individuals trade risk free bonds among themselves there is a large prior literature which examines the characteristics of efficient risksharing in dynamic settings in the presence of private information unlike our paper this literature generally finds that efficient allocations do not coincide with the equilibrium allocations of any economy with a competitive bond market see atkeson and lucas 1992 in particular the key difference between our paper and these preceding ones is that the earlier literature assumes either that agents cannot accumulate resources over time or that if they can this accumulation is observable in contrast we assume that both agents incomes and their stored resources are private information it is this combination of assumptions that leads to our result our findings are reminiscent of allen s 1985 he considers a dynamic principalagent relationship in which the agent is risk averse and has hidden stochastic income the

repeated moral hazard and one sided commitment abstract this paper considers a repeated unobserved endowment economy with a restriction that agents can walk away from insurance contracts at the beginning of any period and contract with another insurer one sided commitment an equilibrium is derived characterized by a unique market determined insurance contract with the property that agents never want to walk away from it the paper shows that trade or insurance still occurs and that a non degenerate long run distribution of consumption exists a numerical example shows that this distribution is nearly log normal journal of economic literature classification numbers d30 d31 d80 d82

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

competitive markets without commitment in the presence of a time inconsistency problem with agency contracts we show that competitive markets can implement allocations that pareto dominate those achieved by a benevolent government and they induce more effort we analyze a model with moral hazard and a two sided lack of commitment after agents have chosen their work firms can modify contracts and agents can switch firms if the ex post market outcome satisfies a weak notion of competitiveness and sufficiently separates individuals it is pareto superior to a government s allocation with a complete breakdown of incentives moreover competitive markets without commitment implement more effort in equilibrium under general conditions

competitive risk sharing contracts with one sided commitment this paper analyzes dynamic equilibrium risk sharing contracts between profit maximizing intermediaries and a large pool of ex ante identical agents that face idiosyncratic income uncertainty that makes them heterogeneous ex post in any given period after having observed her income the agent can walk away from the contract while the intermediary cannot i e there is one sided commitment we consider the extreme scenario that the agents face no costs to walking away and can sign up with any competing intermediary without any reputational losses we demonstrate that not only autarky but also partial and full insurance can obtain depending on the relative patience of agents and financial intermediaries insurance can be provided because in an equilibrium contract an up front payment effectively locks in the agent with an intermediary we then show that our contract economy is equivalent to a consumption savings economy with one period arrow securities and a short sale constraint similar to bulow and rogoff 1989 from this equivalence and our characterization of dynamic contracts it immediately follows that without cost of switching financial intermediaries debt contracts are not sustainable even though a risk allocation superior to autarky can be achieved

income fluctuation and asymmetric information an example of a repeated principal agent problem we examine a simple repeated principal agent model with discounting there are a risk averse borrower with an unobservable random income and a risk neutral lender the efficient contract is characterized it tends to the first best constant consumption contract as the discount factor tends to one and the time horizon extends to infinity if the time horizon is infinite and the contract is legally enforceable the borrower s utility becomes arbitrarily negative with probability one if the borrower has constant absolute risk aversion consumption is transferred between any two states at a constant interest rate which is less than the rate of time preference

on repeated moral hazard with discounting in this paper 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

on optimal unemployment compensation abstract the design of an optimal unemployment compensation scheme is analyzed using a dynamic principal agent relationship between a risk neutral planner the principal and risk averse workers the agents where the planner s inability to observe workers job search efforts creates a moral hazard problem to design an implementable scheme we require that each agent is guaranteed a minimum level of expected discounted utility regardless of his past history in contrast with previous studies we find that the optimal contract is quite close to actual unemployment compensation schemes both qualitatively and quantitatively

the political economy of indirect control this paper characterizes the efficient sequential equilibrium when a government uses indirect control to exert its authority we develop a dynamic principal agent model in which a principal a government delegates the prevention of a disturbance such as riots protests terrorism crime or tax evasion to an agent who has an advantage in accomplishing this task our setting is a standard dynamic principal agent model with two additional features first the principal is allowed to exert direct control by intervening with an endogenously determined intensity of force which is costly to both players second the principal suffers from limited commitment using recursive methods we derive a fully analytical characterization of the likelihood intensity and duration of intervention the first main insight from our model is that repeated and costly interventions are a feature of the efficient equilibrium this is because they serve as a punishment to induce the agent into desired behavior the second main insight is a detailed analysis of a fundamental tradeoff between the intensity and duration of intervention which is driven by the principal s inability to commit finally we derive sharp predictions regarding the impact of various factors on likelihood intensity and duration of intervention we discuss these results in the context of some historical episodes

stochastic costly state verification and dynamic contracts abstract i consider a dynamic costly state verification environment in which a risk averse agent enters into a contract with a risk neutral principal the agent has random income which is unknown to the principal but can be verified at a cost the principal can commit to executing random verifications i extend the standard recursive methods to study the problem and show that it is optimal to set verification probabilities strictly less than 1 if the agent s absolute risk aversion declines sufficiently slowly the principal will use verification regardless of its cost if the agent s income is verified then he would get consumption and continuation utility strictly higher than if his income were not verified

risk bearing and the theory of income distribution this paper develops the stochastic theory of distribution with a dynamic model which focuses on the role of incomplete insurance in generating inequality unlike previous work our approach takes explicit account of the reason for market incompleteness in modeling agents behaviour in particular the amount of risk borne is endogenous using a model of growth with altruism in which agents are risk averse and there is moral hazard we show that lineage wealth follows a markov process which converges globally to an ergodic distribution this also represents the long run population distribution of wealth we discuss the role of particular assumptions such as availability of production loans and unboundedness of utility in yielding the qualitative properties of the distribution of wealth the choice of occupation and the prevention of poverty traps