Disagreement and learning in a dynamic contracting model
AbstractThe authors present a dynamic contracting model in which the principal and the agent disagree about the resolution of uncertainty, and they illustrate the contract design in an application with Bayesian learning. The disagreement creates gains from trade that the principal realizes by transferring payment to states that the agent considers relatively more likely, a shift that changes incentives. In their dynamic setting, the interaction between incentive provision and learning creates an intertemporal source of “disagreement risk” that alters optimal risk sharing. An endogenous regime shift between economies with small and large belief differences is present, and an early shock to beliefs can lead to large persistent differences in variable pay even after beliefs have converged. Under risk-neutrality, “selling the firm” to the agent does not implement the first-best outcome because it precludes state-contingent trades.
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Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 269.
Date of creation: 2008
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Other versions of this item:
- Tobias Adrian & Mark M. Westerfield, 2009. "Disagreement and Learning in a Dynamic Contracting Model," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 3873-3906, October.
- Mark Westerfield & Tobias Adrian, 2007. "Disagreement and Learning in a Dynamic Contracting Model," 2007 Meeting Papers 270, Society for Economic Dynamics.
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