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The simple analytics of information and experimentation in dynamic agency

  • Leonard J. Mirman

    (Department of Economics, University of Virginia, Charlottesville, VA 22903, USA)

  • Thomas D. Jeitschko

    ()

    (Department of Economics, Michigan State University, East Lansing, MI 48824, USA)

  • Egas Salgueiro

    (S.A.G.E.I., Universidade de Aveiro, 3810-Aveiro, PORTUGAL)

The dynamics of a stochastic, two-period principal-agent relationship is studied. The agent's type remains the same over time. Contracts are short term. The principal designs the second contract, taking the information available about the agent after the first period into account. Compared to deterministic environments significant changes emerge: First, fully separating contracts are optimal. Second, the principal has two opposing incentives when designing contracts: the principal `experiments,' making signals more informative; yet dampens signals, thereby reducing up-front payments. As a result, `good' agents' targets are ratcheted over time.

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Article provided by Springer in its journal Economic Theory.

Volume (Year): 19 (2002)
Issue (Month): 3 ()
Pages: 549-570

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Handle: RePEc:spr:joecth:v:19:y:2002:i:3:p:549-570
Note: Received: November 28, 2000; revised version: December 1, 2000
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  1. Leonard J. Mirman & Thomas D. Jeitschko, 2002. "Information and experimentation in short-term contracting," Economic Theory, Springer, vol. 19(2), pages 311-331.
  2. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
  3. Laffont, Jean-Jacques & Tirole, Jean, 1987. "Comparative statics of the optimal dynamic incentive contract," European Economic Review, Elsevier, vol. 31(4), pages 901-926, June.
  4. Freixas, Xavier & Guesnerie, Roger & Tirole, Jean, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 173-91, April.
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