Learning-by-employing: the value of commitment
AbstractWe analyze a dynamic principal–agent model where an infinitely-lived principal faces asequence of finitely-lived agents who differ in their ability to produce output. The ability of anagent is initially unknown to both him and the principal. An agent’s effort affects the informationon ability that is conveyed by performance. We characterize the equilibrium contracts andshow that they display short–term commitment to employment when the impact of effort onoutput is persistent but delayed. By providing insurance against early termination, commitmentencourages agents to exert effort, and thus improves on the principal’s ability to identify theirtalent. We argue that this helps explain the use of probationary appointments in environmentsin which there exists uncertainty about individual ability.Keywords: dynamic principal–agent model, learning, commitment.
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-10 (All new papers)
- NEP-BEC-2010-07-10 (Business Economics)
- NEP-CTA-2010-07-10 (Contract Theory & Applications)
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