On Repeated Moral Hazard with Discounting

In this paper, we analyze optimal contracts in an infinitely repeated agency model in which both the principal and agent discount the future. We show that there is a stationary representation of the optimal contract when the agent's conditional discounted expected utility is used as a state variable. This representation reduces the multi-period problem to a static variational problem which can be analyzed using standard variational techniques. This reduction is used to obtain several properties of the contract.