The complete insurance hypothesis is soundly rejected by the data (e.g. Attanasio and Davis, 1996). On the other hand, the permanent income model assumes that the only mechanism available to the agents to smooth consumption is personal savings (self insurance). Those are clearly two extreme...

We propose a tractable recursive framework to study the optimal allocation of consumption and effort in a dynamic setting with moral hazard where agents have secret access to the credit market or to storage. The recursive structure is based on a generalized first order approach, whose validity...

In this paper we provide sufficient conditions for the validity of the first-order condition approach (FOCA) for two period dynamic moral hazard problems where the agent can save and borrow secretly, and we characterize the optimal contract. Recently, dynamic principal-agent models became very...

We study testable implications for the dynamics of consumption and income of models in which first best allocations are not achieved because of a moral hazard problem with hidden saving. We show that in this environment agents typically achieve more insurance than that obtained under self...

We provide sufficient conditions for the validity of the first-order approach for two period dynamic moral hazard problems, where the agent can save and borrow secretly. We show that in addition to the concavity requirements for the standard moral hazard problem, non-increasing absolute risk...

We provide sufficient conditions for the validity of the first-order approach for two-period dynamic moral hazard problems where the agent can save and borrow secretly. The first-order approach is valid if the following conditions hold: (i) the agent has non-increasing absolute risk aversion...