On Repeated Moral Hazard with Discounting.

This paper analyzes optimal contracts in an infinitely-repeated agency model in which both the principal and agent discount the future. The authors show that there is a stationary representation of the optimal contract when the agent's c onditional, discounted expected utility is used as a state variable. This representation reduces the multiperiod problem to a static varia tional problem, which can be analyzed using standard variational tech niques. This reduction is used to obtain several properties of the co ntract. Copyright 1987 by The Review of Economic Studies Limited.