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Dynamic Non-monetary Incentives

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  • Daniel Bird
  • Alexander Frug

Abstract

We study a principal-agent interaction where investments and rewards arrive stochastically over time and are privately observed by the agent. Investments (costly for the agent, beneficial for the principal) can be concealed by the agent. Rewards (beneficial for the agent, costly for the principal) can be forbidden by the principal. We ask how rewards should be used and which investments incentivized. We identify the unique optimal mechanism and analyze the dynamic investment and compensation policies. When all rewards are identical, the unique optimal way to provide incentives is by a "carte blanche" to pursue all rewards arriving in a predetermined time frame.

Suggested Citation

  • Daniel Bird & Alexander Frug, 2019. "Dynamic Non-monetary Incentives," American Economic Journal: Microeconomics, American Economic Association, vol. 11(4), pages 111-150, November.
    • Handle: RePEc:aea:aejmic:v:11:y:2019:i:4:p:111-50
    Note: DOI: 10.1257/mic.20170025
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    References listed on IDEAS

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    1. Mark Armstrong & John Vickers, 2010. "A Model of Delegated Project Choice," Econometrica, Econometric Society, vol. 78(1), pages 213-244, January.
    2. Lipnowski, Elliot & Ramos, João, 2020. "Repeated delegation," Journal of Economic Theory, Elsevier, vol. 188(C).
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    Cited by:

    1. Daniel Bird & Alexander Frug, 2021. "Optimal Contracts with Randomly Arriving Tasks," The Economic Journal, Royal Economic Society, vol. 131(637), pages 1905-1918.
    2. Spear, Stephen E. & Wang, Cheng, 2005. "When to fire a CEO: optimal termination in dynamic contracts," Journal of Economic Theory, Elsevier, vol. 120(2), pages 239-256, February.
    3. Rantakari, Heikki, 2023. "How to reward honesty?," Journal of Economic Behavior & Organization, Elsevier, vol. 207(C), pages 129-145.
    4. Lipnowski, Elliot & Ramos, João, 2020. "Repeated delegation," Journal of Economic Theory, Elsevier, vol. 188(C).
    5. Daniel Bird & Alexander Frug, 2019. "Monotone Contracts," Working Papers 1085, Barcelona School of Economics.
    6. Siemroth, Christoph, 2022. "Ending Wasteful Year-End Spending: On Optimal Budget Rules in Organizations," Economics Discussion Papers 32231, University of Essex, Department of Economics.
    7. Chen, Yi, 2022. "Dynamic delegation with a persistent state," Theoretical Economics, Econometric Society, vol. 17(4), November.
    8. Forand, Jean Guillaume & Zapal, Jan, 2020. "Production priorities in dynamic relationships," Theoretical Economics, Econometric Society, vol. 15(3), July.
    9. Matthew Mitchell, 2018. "Free (Ad)vice," 2018 Meeting Papers 1194, Society for Economic Dynamics.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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