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Mathematics and Financial Economics

, Volume 9, Issue 3, pp 169–193 | Cite as

Dynamic contracts and learning by doing

  • Julien PratEmail author
Article

Abstract

This paper studies the design of optimal contracts in dynamic environments where agents learn by doing. We derive a condition under which contracts are fully incentive compatible. A closed-form solution is obtained when agents have CARA utility. It shows that human capital accumulation strengthens the power of incentives and allows the principal to provide the agent with better insurance against transitory risks.

Keywords

Principal agent model Moral hazard Human capital  Dynamic incentives 

Notes

Acknowledgments

I thank Boyan Jovanovic for his invaluable support and advice. I am grateful to an anonymous referee and to seminar participants at the University of Zurich, CERGE-EI and Federal Reserve of Minneapolis for comments and suggestions. I acknowledge the support of the Labex Ecodec (ANR-11-LABX-0047) and of the Barcelona GSE.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2014

Authors and Affiliations

  1. 1.CNRS, CREST, UMR2773ParisFrance
  2. 2.Institute for Economic Analysis (CSIC)BGSEBarcelonaSpain

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