Income Smoothing as Rational Equilibrium Behavior? A Second Look

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2017-08-17
Authors
Hemmer, Thomas
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In this paper I revisit the issue of real income smoothing in the setting used by Lambert (1984). I demonstrate that the particular effect identified in his paper is actually an error: under his assumptions there is no input driven equilibrium income smoothing of the type he suggests. There are, however, several other drivers of equilibrium behavior ignored in that paper. In this paper I identify those and for the particular model structure show that when all effects are considered together there is little support for the suggestion that second-best earnings generally is being smoothed through the equilibrium behavior.
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Agency Theory, Multi-Period Contracts, Income Smoothing
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