Article ID Journal Published Year Pages File Type
986460 Review of Economic Dynamics 2006 28 Pages PDF
Abstract

We consider a dynamic moral hazard economy inhabited by a planner and a population of privately informed agents. We assume that the planner and the agents share the same discount factor, but that the planner cannot commit. We show that optimal allocations in such settings solve the problems of committed planners who discount the future less heavily than agents. Thus, we provide micro-foundations for dynamic moral hazard models that assume a societal discount factor in excess of the private one. We extend the analysis to allocations that are reconsideration-proof in the sense of Kocherlakota [Kocherlakota, N., 1996. Reconsideration-proofness: A refinement for infinite horizon time inconsistency. Games and Economic Behavior 15, 33–54]. We show that these allocations solve the choice problem of a committed planner with a unit discount factor.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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