[go: up one dir, main page]

IDEAS home Printed from https://ideas.repec.org/p/sgh/kaewps/2016017.html
   My bibliography  Save this paper

Repeated moral hazard with costly self-control

Author

Listed:
  • Lukasz Wozny
Abstract
We consider a repeated principal-agent model, where a single agent exhibits problems of self control modelled using Gul and Pesendorfer (2001) type temptation preferences. In such a setting, for a parameterized strength of self-control, we solve for the optimal multi-period contract. Our analysis identifies a new channel of principal and agent interactions, that can be used to provide incentives, this being the reduction of agent's self control costs. In fact, the principal computes (and uses) agent's most tempting item but never finds it optimal to reduce the agent's self-control cost to zero. Presence of this new channel challenges typical results obtained in models with no-temptation on the agent's side. For example, the intrinsic motivation (resulting from costly self-control) can substitute for standard (external) incentives, and hence the moral hazard problem can be mitigated (for sufficiently high temptation parameter). Moreover, the optimal contract calls for a lower deferred part of the bonus (or consumption smoothing) than in the model with no temptations. Under limited commitment, presence of self-control also reduces agent's willingness to break or renegotiate the contract after output realization within some period, and make the optimal contract spot implementable (again for sufficiently high temptation). Impact of self-control on the cost of implementation as well as willingness to safe/borrow is ambiguous, however.

Suggested Citation

  • Lukasz Wozny, 2016. "Repeated moral hazard with costly self-control," KAE Working Papers 2016-017, Warsaw School of Economics, Collegium of Economic Analysis.
  • Handle: RePEc:sgh:kaewps:2016017
    as

    Download full text from publisher

    File URL: http://kolegia.sgh.waw.pl/pl/KAE/Documents/WorkingPapersKAE/WPKAE_2016_017.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kfir Eliaz & Ran Spiegler, 2006. "Contracting with Diversely Naive Agents," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(3), pages 689-714.
    2. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November.
    3. Paul Heidhues & Botond Koszegi, 2010. "Exploiting Naivete about Self-Control in the Credit Market," American Economic Review, American Economic Association, vol. 100(5), pages 2279-2303, December.
    4. Bezalel Peleg & Menahem E. Yaari, 1973. "On the Existence of a Consistent Course of Action when Tastes are Changing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 40(3), pages 391-401.
    5. Chiappori, Pierre-Andre & Macho, Ines & Rey, Patrick & Salanie, Bernard, 1994. "Repeated moral hazard: The role of memory, commitment, and the access to credit markets," European Economic Review, Elsevier, vol. 38(8), pages 1527-1553, October.
    6. Yılmaz, Murat, 2013. "Repeated moral hazard with a time-inconsistent agent," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 70-89.
    7. Noor, Jawwad, 2007. "Commitment and self-control," Journal of Economic Theory, Elsevier, vol. 135(1), pages 1-34, July.
    8. E. S. Phelps & R. A. Pollak, 1968. "On Second-Best National Saving and Game-Equilibrium Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 35(2), pages 185-199.
    9. Łukasz Balbus & Kevin Reffett & Łukasz Woźny, 2015. "Time consistent Markov policies in dynamic economies with quasi-hyperbolic consumers," International Journal of Game Theory, Springer;Game Theory Society, vol. 44(1), pages 83-112, February.
    10. Caplin, Andrew & Leahy, John, 2006. "The recursive approach to time inconsistency," Journal of Economic Theory, Elsevier, vol. 131(1), pages 134-156, November.
    11. Stephen E. Spear & Sanjay Srivastava, 1987. "On Repeated Moral Hazard with Discounting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(4), pages 599-617.
    12. Gilpatric, Scott M., 2008. "Present-biased preferences, self-awareness and shirking," Journal of Economic Behavior & Organization, Elsevier, vol. 67(3-4), pages 735-754, September.
    13. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
    14. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 443-478.
    15. Wojciech Olszewski, 2011. "A model of consumption-dependent temptation," Theory and Decision, Springer, vol. 70(1), pages 83-93, January.
    16. Esteban, Susanna & Miyagawa, Eiichi, 2006. "Temptation, self-control, and competitive nonlinear pricing," Economics Letters, Elsevier, vol. 90(3), pages 348-355, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Woźny, Łukasz, 2015. "On incentives, temptation and self-control," Mathematical Social Sciences, Elsevier, vol. 74(C), pages 60-67.
    2. Lukasz Wozny & Michal Krawczyk, 2016. "An experiment on temptation and attitude towards paternalism," KAE Working Papers 2016-018, Warsaw School of Economics, Collegium of Economic Analysis.
    3. Balbus, Łukasz & Reffett, Kevin & Woźny, Łukasz, 2022. "Time-consistent equilibria in dynamic models with recursive payoffs and behavioral discounting," Journal of Economic Theory, Elsevier, vol. 204(C).
    4. Yılmaz, Murat, 2015. "Contracting with a naïve time-inconsistent agent: To exploit or not to exploit?," Mathematical Social Sciences, Elsevier, vol. 77(C), pages 46-51.
    5. Yılmaz, Murat, 2013. "Repeated moral hazard with a time-inconsistent agent," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 70-89.
    6. Méder, Zsombor Z. & Flesch, János & Peeters, Ronald, 2017. "Naiveté and sophistication in dynamic inconsistency," Mathematical Social Sciences, Elsevier, vol. 87(C), pages 40-54.
    7. Laureti, Carolina & Szafarz, Ariane, 2023. "Banking regulation and costless commitment contracts for time-inconsistent agents," Economic Modelling, Elsevier, vol. 129(C).
    8. Lilia Maliar & Serguei Maliar, 2016. "Ruling Out Multiplicity of Smooth Equilibria in Dynamic Games: A Hyperbolic Discounting Example," Dynamic Games and Applications, Springer, vol. 6(2), pages 243-261, June.
    9. Yu, Pei Cheng, 2020. "Seemingly exploitative contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 299-320.
    10. Doruk Cetemen & Felix Zhiyu Feng & Can Urgun, 2019. "Contracting with Non-Exponential Discounting: Moral Hazard and Dynamic Inconsistency," Working Papers 2019-17, Princeton University. Economics Department..
    11. Murat Yilmaz, 2018. "An Extended Survey of Time-Inconsistency and Its Applications," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 32(1), pages 55-73.
    12. Minwook Kang, 2019. "Pareto-improving tax policies under hyperbolic discounting," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(3), pages 618-660, June.
    13. Florian Englmaier & Matthias Fahn & Marco A. Schwarz, 2016. "Long-Term Employment Relations when Agents are Present Biased," CESifo Working Paper Series 6159, CESifo.
    14. Mihm, Maximilian & Ozbek, Kemal, 2019. "On the identification of changing tastes," Games and Economic Behavior, Elsevier, vol. 116(C), pages 203-216.
    15. Fahn, Matthias & Seibel, Regina, 2022. "Present bias in the labor market – when it pays to be naive," Games and Economic Behavior, Elsevier, vol. 135(C), pages 144-167.
    16. Mihm, Maximilian & Ozbek, Kemal, 2018. "Mood-driven choices and self-regulation," Journal of Economic Theory, Elsevier, vol. 176(C), pages 727-760.
    17. David S. Ahn & Ryota Iijima & Yves Le Yaouanq & Todd Sarver, 2017. "Behavioral Characterizations of Naivet� for Time-Inconsistent Preferences," Cowles Foundation Discussion Papers 2074, Cowles Foundation for Research in Economics, Yale University.
    18. Basu, Karna, 2014. "Commitment savings in informal banking markets," Journal of Development Economics, Elsevier, vol. 107(C), pages 97-111.
    19. Weinschenk, Philipp, 2021. "On the benefits of time-inconsistent preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 182(C), pages 185-195.
    20. Bryan, Gharad & Karlan, Dean & Nelson, Scott, 2009. "Commitment Contracts," Working Papers 73, Yale University, Department of Economics.

    More about this item

    Keywords

    repeated moral hazard; self-control costs; temptation; principal-agent; optimal contract;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sgh:kaewps:2016017. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dariusz Nojszewski (email available below). General contact details of provider: https://edirc.repec.org/data/kawawpl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.