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Dynamic Moral Hazard Without Commitment, Johannes Hörner, Larry Samuelson

Cowles Foundation Discussion Papers

We study a discrete-time model of repeated moral hazard without commitment. In every period, a principal finances a project, choosing the scale of the project and a contingent payment plan for an agent, who has the opportunity to appropriate the returns of a successful project unbeknownst the principal. The absence of commitment is reflected both in the solution concept (perfect Bayesian equilibrium) and in the ability of the principal to freely revise the project’s scale from one period to the next. We show that removing commitment from the equilibrium concept is relatively innocuous — if the players are sufficiently patient, …