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Incentives for Experimenting Agents

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    Abstract

    We examine a repeated interaction between an agent, who undertakes experiments, and a principal who provides the requisite funding for these experiments. The agent's actions are hidden, and the principal, who makes the offers, cannot commit to future actions. We identify the unique Markovian equilibrium (whose structure depends on the parameters) and characterize the set of all equilibrium payoffs, uncovering a collection of non-Markovian equilibria that can Pareto dominate and reverse the qualitative properties of the Markovian equilibrium. The prospect of lucrative continuation payoffs makes it more expensive for the principal to incentivize the agent, giving rise to a dynamic agency cost. As a result, constrained efficient equilibrium outcomes call for nonstationary outcomes that front-load the agent's effort and that either attenuate or terminate the relationship inefficiently early.

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    File URL: http://cowles.econ.yale.edu/P/cd/d17a/d1726.pdf
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    Bibliographic Info

    Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1726.

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    Length: 65 pages
    Date of creation: Sep 2009
    Date of revision:
    Handle: RePEc:cwl:cwldpp:1726

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

    Related research

    Keywords: Experimentation; Learning; Agency; Dynamic agency; Venture capital; Repeated principal-agent problem;

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    1. Bergemann, Dirk & Hege, Ulrich, 2001. "The Financing of Innovation: Learning and Stopping," CEPR Discussion Papers 2763, C.E.P.R. Discussion Papers.
    2. Dirk Bergemann & Ulrich Hege & Liang Peng, 2009. "Venture Capital and Sequential Investments," Levine's Working Paper Archive 814577000000000046, David K. Levine.
    3. Dino Gerardi & Lucas Maestri, 2008. "A Principal-Agent Model of Sequential Testing," Cowles Foundation Discussion Papers 1680, Cowles Foundation for Research in Economics, Yale University.
    4. Bergemann, Dirk & Hege, Ulrich, 1998. "Venture capital financing, moral hazard, and learning," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 703-735, August.
    5. Carine Peeters & Bruno Van Pottelsberghe, 2003. "Measuring innovation competencies and performances: a survey of large firms in Belgium," Working Papers CEB 04-005.RS, ULB -- Universite Libre de Bruxelles.
    6. Matthias Doepke & Robert M. Townsend, 2002. "Dynamic Mechanism Design With Hidden Income and Hidden Actions," UCLA Economics Working Papers 818, UCLA Department of Economics.
    7. Francesca Cornelli & Oved Yosha, 2003. "Stage Financing and the Role of Convertible Securities," Review of Economic Studies, Wiley Blackwell, vol. 70(1), pages 1-32, January.
    8. Francesca Cornelli & Oved Yosha, 2003. "Stage Financing and the Role of Convertible Securities," Review of Economic Studies, Oxford University Press, vol. 70(1), pages 1-32.
    9. Mason, Robin & Välimäki, Juuso, 2008. "Dynamic Moral Hazard and Project Completion," CEPR Discussion Papers 6857, C.E.P.R. Discussion Papers.
    10. Asher Blass & Oved Yosha, 2003. "Financing R&D in mature companies: An empirical analysis," Economics of Innovation and New Technology, Taylor and Francis Journals, vol. 12(5), pages 425-447.
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