Abstract
This paper studies how compensation and incentives are provided in a multiperiod setting to a loss averse agent with reference-dependent preferences. The two-period contract is different contingent on whether or not the agent has committed to remain both periods. The two-period analysis shows that, if the agent is a poor performer (in a sense to be made precise), it is to his advantage to not commit whereas if he is a superior performer, commitment is to his advantage. Whether or not the agent has committed to remain, the two-period moral hazard contract compensates the agent in the second period based on his performance in the first period, providing incentives both immediate and intertemporal. When the agent is committed, a natural measure of the agent's first-period performance emerges. The analysis of the general T-period contract shows that the two-period results hold in all but the last period.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
