The Multiperiod Principal-Agent Problem

Abstract
In repeated principal-agent models, long-term contracts can improve on short-term contracts only if they commit either principal or agent to a payoff in some future circumstance lower than could be obtained from a short-term contract negotiated if that circumstance occurs. We show that efficient contracting under moral hazard alone does not require long-term commitment from the principal. Provided a short-term contract can punish the agent sufficiently (in a sense made precise), it requires no commitment from the agent either. Then linking payoffs in one period to outcomes in previous periods does not improve the tradeoff between incentives and risk sharing.