Template-Type: ReDIF-Paper 1.0 
Title: Repeated moral hazard with costly self-control
Author-Name: Łukasz Woźny 
Abstract: We consider a repeated principal-agent model, where a single agent exhibits problems ofself control modelled using Gul and Pesendorfer (2001) type temptation preferences. In sucha setting, for a parameterized strength of self-control, we solve for the optimal multi-periodcontract. Our analysis identifies a new channel of principal and agent interactions, that canbe used to provide incentives, this being the reduction of agent's self control costs. In fact,the principal computes (and uses) agent's most tempting item but never finds it optimalto reduce the agent's self-control cost to zero. Presence of this new channel challenges typicalresults obtained in models with no-temptation on the agent's side. For example, theintrinsic motivation (resulting from costly self-control) can substitute for standard (external)incentives, and hence the moral hazard problem can be mitigated (for sufficiently hightemptation parameter). Moreover, the optimal contract calls for a lower deferred part of thebonus (or consumption smoothing) than in the model with no temptations. Under limitedcommitment, presence of self-control also reduces agent's willingness to break or renegotiatethe contract after output realization within some period, and make the optimal contract spotimplementable (again for sufficiently high temptation). Impact of self-control on the cost ofimplementation as well as willingness to safe/borrow is ambiguous, however.
Number: 2016-017
Length: 21 pages 
Creation-Date: 2016-10
Keywords: repeated moral hazard, self-control costs, temptation, principal-agent, optimal contract
Classification-JEL: D86
File-URL: https://hdl.handle.net/20.500.12182/1159
File-Format: Application/pdf
DOI: 10.33119/kaewps2016017
Handle: RePEc:sgh:kaewps:2016017