The simple analytics of information and experimentation in dynamic agency
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.
Volume (Year): 19 (2002)
Issue (Month): 3 ()
|Note:||Received: November 28, 2000; revised version: December 1, 2000|
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- 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.
- Bengt Holmstrom & Paul R. Milgrom, 1985.
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Cowles Foundation Discussion Papers
742, Cowles Foundation for Research in Economics, Yale University.
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- Leonard J. Mirman & Thomas D. Jeitschko, 2002. "Information and experimentation in short-term contracting," Economic Theory, Springer, vol. 19(2), pages 311-331.
- 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.
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