Working Paper Series Repeated Moral Hazard with Effort Persistence Wp 08-04 Arantxa Jarque Federal Reserve Bank of Richmond Repeated Moral Hazard with Effort Persistence

I study a problem of repeated moral hazard in which the effect of effort is persistent over time: each period’s outcome distribution is a function of a geometrically distributed lag of past efforts. I show that when the utility of the agent is linear in effort, a simple rearrangement of terms in his lifetime utility translates this problem into a related standard repeated moral hazard. The solutions for consumption in the two problems are observationally equivalent, implying that the main properties of the optimal contract remain unchanged with persistence. To illustrate, I present the computed solution of an example. Journal of Economic Literature Classification Numbers: D30, D31, D80, D82.