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The simple analytics of information and experimentation in dynamic agency

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Author Info

  • Leonard J. Mirman

    (Department of Economics, University of Virginia, Charlottesville, VA 22903, USA)

  • Thomas D. Jeitschko

    ()
    (Department of Economics, Michigan State University, East Lansing, MI 48824, USA)

  • Egas Salgueiro

    (S.A.G.E.I., Universidade de Aveiro, 3810-Aveiro, PORTUGAL)

Abstract

The dynamics of a stochastic, two-period principal-agent relationship is studied. The agent's type remains the same over time. Contracts are short term. The principal designs the second contract, taking the information available about the agent after the first period into account. Compared to deterministic environments significant changes emerge: First, fully separating contracts are optimal. Second, the principal has two opposing incentives when designing contracts: the principal `experiments,' making signals more informative; yet dampens signals, thereby reducing up-front payments. As a result, `good' agents' targets are ratcheted over time.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 19 (2002)
Issue (Month): 3 ()
Pages: 549-570

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Handle: RePEc:spr:joecth:v:19:y:2002:i:3:p:549-570

Note: Received: November 28, 2000; revised version: December 1, 2000
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Related research

Keywords: Bayesian learning; Experimentation; Dynamic agency; Ratchet effect; Regulation; Procurement.;

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References

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  1. Leonard J. Mirman & Thomas D. Jeitschko, 2002. "Information and experimentation in short-term contracting," Economic Theory, Springer, vol. 19(2), pages 311-331.
  2. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
  3. Laffont, Jean-Jacques & Tirole, Jean, 1987. "Comparative statics of the optimal dynamic incentive contract," European Economic Review, Elsevier, vol. 31(4), pages 901-926, June.
  4. Freixas, Xavier & Guesnerie, Roger & Tirole, Jean, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 173-91, April.
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Cited by:
  1. Neelam Jain & Thomas D. Jeitschko & Leonard J. Mirman, 2003. "Entry Deterrence under Agency Constraints," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 2(3), pages 179-195, December.
  2. Neelam Jain & Leonard Mirman, 2011. "Lender learning and entry under general demand uncertainty," Review of Economic Design, Springer, vol. 15(2), pages 163-175, June.

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