REPEATED MORAL HAZARD - THE ROLE OF MEMORY, COMMITMENT, AND THE ACCESS TO CREDIT MARKETS

The dynamic dimension introduces new questions in moral hazard models. Thus, the roles of memory and commitment have recently raised a marke d interest. The goal of this paper is to discuss and clarify the issue s at hand and to present some new results. We show that two conditions are necessary for the optimal long-term contract to be implementable via spot contracts: first, the long-term optimum should be renegotiati on-proof; second, spot contracts should provide efficient consumption smoothing. We discuss how the availability of credit to the agent affe cts these two prerequisites. We also study the hitherto neglected case in which the repetition of the moral hazard problem generates hidden information at recontracting dates: the optimal renegotiation-proof co ntract then implements the minimum effort level, unless it involves ra ndomized savings.