Repeated moral hazard with effort persistence

We study a problem of repeated moral hazard where the e¤ect of e¤ort is persistent over time: each period’s outcome distribution is a function of a distributed lag of past e¤orts. We show that when the utility of the agent is linear in e¤ort, a simple rearrangement of terms in his lifetime utility translates this problem into a standard repeated moral hazard. As a consequence, the optimal consumption pro…le is observationally equivalent to that of a related problem without persistence. This suggests that the presence of persistence does not necessarily change the properties of optimal contracts. Journal of Economic Literature Classi…cation Numbers: D30, D31, D80, D82.