- Title
- Contracting with Non-Exponential Discounting: Moral Hazard and Dynamic Inconsistency
- Author(s)
- Doruk Cetemen Doruk Cetemen (Collegio Carlo Alberto)
- Felix Zhiyu Feng Felix Feng (University of Washington)
- Can Urgun Can Urgun (Princeton University)
- Abstract
- We develop a framework for dynamic moral hazard problems with dynamic inconsistencies resulting from general, non-exponential discount functions. We derive the principal-optimal contract as a Markov perfect Nash equilibrium of the game played between the agent’s and the principal’s future selves. Such contract exists even when both contracting parties have dynamically inconsistent discount functions, and can be characterized via a system of differential equations rather than the classical Hamilton Jacobi-Bellman equation. We demonstrate the applicability of our framework by solving two examples in closed form: one with quasi-hyperbolic discounting and one with anticipatory utility.
- Creation Date
- 2019-08
- Section URL ID
- Paper Number
- 2019-17
- URL
- https://scholar.princeton.edu/sites/default/files/curgun/files/tic_11.pdf
- File Function
- Jel
- D81, D86, D91
- Keyword(s)
- Continuous-time contracting, dynamic inconsistency, HJB system, nonatomic games
- Suppress
- false
- Series
- 13