Koehne, S.;
(2009)
Repeated moral hazard with history-dependent preferences.
(CDSE Discussion Paper
71).
Center for Doctoral Studies in Economics (CDSE), University of Mannheim: Mannheim, Germany.
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Abstract
This paper introduces history-dependent preferences into the principal-agent framework. In this setup, the Inverse Euler equation breaks down. The paper characterizes optimal contracts and shows that the wedge between the principal’s rate of return to saving and the agent’s shadow rate of return is not positive in general. However, the wedge is positive given a rather weak assumption on the agent’s marginal rate of intertemporal substitution. This points out an intimate link between the sign of the wedge and regressive/progressive taxation of wealth. Finally, the paper explores differences between the two most common models of history-dependent preferences.
| Type: | Working / discussion paper |
|---|---|
| Title: | Repeated moral hazard with history-dependent preferences |
| Open access status: | An open access version is available from UCL Discovery |
| Publisher version: | http://cdse.uni-mannheim.de/dipa.php |
| Language: | English |
| Keywords: | Repeated moral hazard, principal-agent problem, history-dependent preferences, habit formation, intertemporal wedge, optimal taxation |
| UCL classification: | UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics |
| URI: | https://discovery.ucl.ac.uk/id/eprint/18770 |
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