The dynamic dimension introduces new questions in moral hazard models. Thus, the roles of memory and commitment have recently raised a marked interest. The goal of this paper is to discuss and clarify the issues at hand and to present some new results. We show that two conditions are necessary for the optimal long-term contract to be implementable via spot contracts: first, the long-term optimum should be renegotiation-proof; second, spot contracts should provide efficient consumption smoothing. We discuss how the availability of credit to the agent affects these two prerequisites. We also study the hitherto neglected case in which the repetition of the moral hazard problem generates hidden information at recontracting dates: the optimal renegotiation-proof contract then implements the minimum effort level, unless it involves randomized savings. © 1994.
- Credit market and incentives
- Moral hazard