Events

Dr. Allen Vong
UM Macao Fellow
University of Macau

I highlight a novel role of mediation in addressing dynamic moral hazard. A worker, whose effort is costly and hidden, serves a sequence of short-run clients under a manager’s supervision. The manager cannot control the worker’s wage, but can tell the worker his expectations from her and evaluate her actual performances. I show that, to maximize the worker’s productivity, the manager rewards good outputs by secretly telling the worker to shirk against certain clients and assuring her that bad outputs against these clients will not affect her evaluation. I obtain an explicit characterization of equilibrium dynamics, showing that in the short run, rewards frequently occur and eventually, rewards become less frequent over time and the worker is punished following bad outputs.