Moral Hazard and Long-Run Incentives

Moral Hazard and Long-Run Incentives

April 22,2014Working Paper No. 3430

This paper considers dynamic moral hazard settings, in which the agent’s actions have consequences in the future. To maintain incentives, the optimal contract ties deferred compensation and termination to future performance. Some of the performance sensitive compensation is paid out after termination. The pay performance sensitivity provided by the contract builds up to a target during the agent’s tenure, but decreases after termination.