Improving the Effort Concept: A Revision of the Traditional Approach in the Context of Controlled Dynamic Stochastic Environments

The objective of this paper is to re-evaluate the attitude to effort of a risk-averse decision- maker in an evolving environment. In the classical analysis, the space of efforts is generally discretized. More realistic, this new approach employes a continuum of effort levels. The pres- ence of multiple possible efforts and performance levels provide a better basis for explaining real economic phenomena. In the context of a principal-agent relationship, not only the incentives of the Principal can determine the private agent to exert a good effort, but also the evolution of the dynamic system. The dynamic incentives can be ineffective when the environment does not sufficiently incite the agent to allocate effort. This possible scenario explains why some efficient strategic incentive-compatible constraints that cover the entire period of contract do not generally exist. The proposed approach offers an elegant study of the close relationship between behavior, attitude and effort allocation.