Implications of Unequal Discounting in Dynamic Contracting

Dynamic contracts allow principal to relax future incentive constraints by backloading-- agent posts a bond which is liquidated over time. This is costless with equal access to capital, captured by equal discount rates. Here unequal discounting is introduced in a canonical screening problem where agent has Markovian private information and limited commitment. The backloading force is tempered by an inter-temporal cost of incentive provision. The optimal contract features cycles with infinite memory. The interaction of Marokvian information and unequal discounting can render the standard relaxed approach invalid. An approximately optimal and simple alternative is provided, where both terms are formalized