A Principal-Agent Model of Sequential Testing

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A Principal-Agent Model of Sequential Testing

Author Info

Dino Gerardi () (Cowles Foundation, Yale University)
Lucas Maestri (Dept. of Economics, Yale University)

Abstract

This paper analyzes the optimal provision of incentives in a sequential testing context. In every period the agent can acquire costly information that is relevant to the principal's decision. Neither the agent's effort nor the realizations of his signals are observable. First, we assume that the principal and the agent are symmetrically informed at the time of contracting. We construct the optimal mechanism and show that the agent is indifferent in every period between performing the test and sending an uninformative message which continues the relationship. Furthermore, in the first period the agent is indifferent between carrying out his task and sending an uninformative message which ends the relationship immediately. We then characterize the optimal mechanisms when the agent has superior information at the outset of the relationship. The principal prefers to offer different contracts if and only if the agent types are sufficiently diverse. Finally, all agent types benefit from their initial private information.

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Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1680.

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Length: 47 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:cwl:cwldpp:1680

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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-11-11 (All new papers)
NEP-CTA-2008-11-11 (Contract Theory & Applications)

References listed on IDEAS
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