Repeated Two-Sided Moral Hazard

In this paper I study a class of repeated two-sided moral hazard problems with discounting. I consider two agents who are involved in multiperiod, and possibly infinite-horizon, contractual relationships. In every period, the agents simultaneously take hidden actions, each of which independently affects the distribution of a separate random public signal. The realizations of the public signals jointly determine the output of a perishable final good, which the agents consume. This abstract framework can be used to analyze contractual relations within a variety of institutions, such as partnership firms, households, or cooperatives, in which bilateral moral hazard is an essential feature. I examine the nature of Pareto optimal contracts in this environment that respect both technological and informational constraints. After establishing the existence of optimal contracts, I show that every continuation contract of an optimal contract is itself optimal. Using this recursive property, next I derive a partial, but fairly general, characterization of optimal consumption allocations. It is an equation that links the ratio of marginal utilities of the agents in the current period to the same ratio in the next period. Moreover, optimal contracts imply that the sequence of ratios of marginal utilities in each period is a submartingale. I provide sufficient conditions for the submartingale to converge. Finally, using this result, I identify conditions under which one agent receives all surplus in the long run.

On Renegotiation-Proof Contracts in Repeated Agency

In this paper I study ``renegotiation-proof" contracts in infinite-horizon principal-agent environment. A concept of renegotiation-proofness is adopted, which not only has the appeal of intuitively generalizing its counterpart in finite-horizon environment but proves to be a powerful device for characterizing the allocations that satisfy the notion. It is shown that renegotiation-proof contracts exist under broad conditions and admit simple characterizations.

Rigidity in bilateral trade with holdup

This paper studies bilateral trade in which the seller makes a hidden investment that influences the buyer's hidden valuation. In general it is impossible to implement both first-best efficient trade and efficient investment using budget-balanced trading mechanisms. The paper fully characterizes the constrained efficient contracts. It is shown that the optimal tradeoff between allocative efficiency and incentive provision results in rigidity in trade, the degree of which depends on the seriousness of the holdup problem. Sufficient conditions are also provided for full separation of buyer types to take place in optimal contracts when the holdup problem is not too severe. The seller may overinvest relative to the first best.Bilateral contracting, hidden action and hidden information, holdup problem, nonlinear pricing