Finance Seminar（2015-06）

Topic: The Optimality of Arm's-Length, Memoryless Contracts

Speaker: John Yiran Zhu, The Wharton School, University of Pennsylvania

Time: Thursday, 26 March, 10:30-11:50

Location: Room 217, Guanghua Building 2

Abstract: Most long-term employment relationships are governed by a series of arm's-length, memoryless short-term contracts: The worker is evaluated infrequently and his future prospects depend on the manager's current evaluation, but not evaluations from long ago. I show how such arrangements are uniquely optimal in a general repeated moral hazard model with complete contracts - where the manager could, in theory, evaluate the worker constantly and employ a highly history-dependent evaluation report strategy. The intuition behind my result is robust, applicable to contracting between risk averse parties and to a wide range of signal structures.