The simple analytics of information and experimentation in dynamic agency
AbstractThe 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 InfoPaper provided by Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro in its series Working Papers de Economia (Economics Working Papers) with number 12.
Length: 25 pages
Date of creation: Jan 2004
Date of revision:
Publication status: Published in Economic Theory, 19, 549-570 (2002)
Bayesian learning; Experimentation; Dynamic agency; Ratchet effect; Regulation; Procurement;
Other versions of this item:
- Leonard J. Mirman & Thomas D. Jeitschko & Egas Salgueiro, 2002. "The simple analytics of information and experimentation in dynamic agency," Economic Theory, Springer, vol. 19(3), pages 549-570.
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- L5 - Industrial Organization - - Regulation and Industrial Policy
- H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
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