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Repeated moral hazard with history-dependent preferences

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. Green open access

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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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