This paper characterizes the optimal contract when the agent is endowed with aspirational utility. Our analysis reveals that effort and aspirations act as complements: the principal utilizes aspirational ``boosters'' to induce local risk-loving behavior, reducing the welfare costs of incentives and leading to higher effort levels. We find that the optimal compensation contract features a discontinuous jump to reach the aspiration point after good performance,...

We develop a dynamic household finance model showing that student loans --  non-dischargeable in the U.S. bankruptcy -- alleviate the well-documented debt overhang in labor supply decisions. Non-dischargeability mutes opportunities for households to strategically reduce labor supply at the expense of creditors, thus mitigating incentive distortions. This effect, however, is partially undone by Income-Driven Repayment (IDR) plans, which set student loan payments formulaically regardless of...

This paper develops a methodology to solve dynamic principal-agent problems in which the agent features present-biased time preferences and naive beliefs. There are three insights. First, the problem has a recursive representation using the agent's perceived continuation value as a state variable (i.e., the remaining value the agent (wrongly) anticipates getting from the contract). Second, incentive compatibility corresponds to a volatility constraint on the agent's...