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Paying and Persuading

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  • Daniel Luo

Abstract

I study dynamic contracting where a principal (Sender) privately observes a Markovian state and seeks to motivate an agent (Receiver) who takes actions. Sender can both use payments to augment ex-post payoffs or persuasion to alter the informational environment as ways to provide incentives. For any stage-game payoffs, cost of transfers, rate of future discounting, and Markov transition rule, optimal transfers are backloaded-payments occur only when Sender commits to reveal the state at all continuation histories. In a rideshare example, the optimal contract is a loyalty program: drivers receive the static optimal information structure until a random promotion time, after which the state is fully revealed and only payments are used to motivate the driver.

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  • Daniel Luo, 2025. "Paying and Persuading," Papers 2503.06007, arXiv.org, revised Oct 2025.
    • Handle: RePEc:arx:papers:2503.06007
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    References listed on IDEAS

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    1. Li, Cheng, 2017. "A model of Bayesian persuasion with transfers," Economics Letters, Elsevier, vol. 161(C), pages 93-95.
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