Alejandro Joffre (CMM, Santiago du Chili)

We analyze a dynamic moral hazard principal-agent model with an agent who is loss averse and whose reference updates according to the previous period’s consumption. When there is full commitment and the agent has no access to credit, in every period after the first the optimal payment scheme is insensitive to the current outcome in an interval, offering to pay the reference for a set of performance measures. Therefore, there is a positive probability of observing wage persistence even if outcomes vary over time. Moreover, the model predicts a “status quo bias” - a preference for consuming the full allocation if the agent were allowed to intertemporally reallocate consumption after the outcome is realized. This result in turn implies that unlike the canonical model, the optimal contract may be implemented even when the agent has access to a savings technology.