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Delegating trial and error

Author

Listed:
  • Okat, Deniz
  • Nash, John G.F.

Abstract

A principal delegates a problem to an agent. The agent solves the problem by conducting independent trials. Each trial is privately costly and produces the solution with some probability. The principal relies on the agent to report the solution before realizing its benefits. The ability to conceal the solution enables the agent to extract rents from the principal. The optimal contract with commitment balances the agent's rents against the timeliness of the solution, and typically induces the agent to inefficiently idle. The optimal renegotiation-proof contract eliminates idleness, maximizes total surplus, yet cedes significant further rents to the agent. A principal that lacks commitment might optimally slow down problem solving by increasing the time taken to perform trials.

Suggested Citation

  • Okat, Deniz & Nash, John G.F., 2024. "Delegating trial and error," Journal of Economic Theory, Elsevier, vol. 217(C).
    • Handle: RePEc:eee:jetheo:v:217:y:2024:i:c:s0022053124000085
    DOI: 10.1016/j.jet.2024.105802
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    More about this item

    Keywords

    Trial and error; Dynamic agency problems; Commitment; Renegotiation;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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