CONTRACT-BASED MOTIVATION FOR KEEPING RECORDS OF A MANAGERS REPORTINGAND BUDGETING HISTORY

This paper analyzes the role of the agent's bankruptcy constraints in multiperiod principal-agent models with asymmetric information. Condit ions are provided under which commitment to a long-term contract invol ving N rounds of investment improves upon repetition of N identical si ngle-period contracts. Further, when the agent's reservation wage is s ufficiently low the optimal contract is always long term. Keeping reco rds of a manager's history of reporting activity facilitates contracti ng, since optimal contracts may require a link between past reports an d future investments over a duration of two or more periods.