Thomas D. Jeitschko () (Department of Economics, Michigan State University) Leonard J. Mirman (Department of Economics, University of Virginia) Egas Salgueiro () (Departamento de Economia e Gestão Industrial, Universidade de Aveiro)
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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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Length: 25 pages Date of creation: Jan 2004 Date of revision: Publication status: Published in Economic Theory, 19, 549-570 (2002) Handle: RePEc:ave:wpaper:122004
Find related papers by JEL classification: 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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