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The simple analytics of information and experimentation in dynamic agency

Author

Listed:
  • Thomas D. Jeitschko

    (Department of Economics, Michigan State University)

  • Leonard J. Mirman

    (Department of Economics, University of Virginia)

  • Egas Salgueiro

    (Departamento de Economia e Gestão Industrial, Universidade de Aveiro)

Abstract

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.

Suggested Citation

  • Thomas D. Jeitschko & Leonard J. Mirman & Egas Salgueiro, 2004. "The simple analytics of information and experimentation in dynamic agency," Working Papers de Economia (Economics Working Papers) 12, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
    • Handle: RePEc:ave:wpaper:122004
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    References listed on IDEAS

    as
    1. 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.
    2. Xavier Freixas & Roger Guesnerie & Jean Tirole, 1985. "Planning under Incomplete Information and the Ratchet Effect," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(2), pages 173-191.
    3. Harris Milton & Townsend, Robert M, 1981. "Resource Allocation under Asymmetric Information," Econometrica, Econometric Society, vol. 49(1), pages 33-64, January.
    4. Leonard J. Mirman & Thomas D. Jeitschko, 2002. "Information and experimentation in short-term contracting," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 19(2), pages 311-331.
    5. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
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    Cited by:

    1. Bhattacharjee, Swagata, 2022. "Dynamic contracting for innovation under ambiguity," Games and Economic Behavior, Elsevier, vol. 132(C), pages 534-552.
    2. Leonard J. Mirman & Thomas D. Jeitschko, 2002. "Information and experimentation in short-term contracting," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 19(2), pages 311-331.
    3. Leonard J. Mirman & Thomas Jeitschko & Neelam Jain, 2001. "Financial Intermediation and Entry-Deterrence: A survey," Economics Bulletin, AccessEcon, vol. 12(1), pages 1-13.
    4. Jeitschko, Thomas D. & Withers, John A., 2019. "Dynamic regulation revisited: Signal dampening, experimentation and the ratchet effect," DICE Discussion Papers 318, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    5. Swagata Bhattacharjee, 2019. "Dynamic Contracting for Innovation Under Ambiguity," Working Papers 1022, Ashoka University, Department of Economics, revised Aug 2019.
    6. Neelam Jain & Thomas D. Jeitschko & Leonard J. Mirman, 2003. "Entry Deterrence under Agency Constraints," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 2(3), pages 179-195, December.
    7. Neelam Jain & Leonard Mirman, 2011. "Lender learning and entry under general demand uncertainty," Review of Economic Design, Springer;Society for Economic Design, vol. 15(2), pages 163-175, June.
    8. Jain, Neelam, 2006. "Debt, managerial compensation and learning," European Economic Review, Elsevier, vol. 50(2), pages 377-399, February.

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    More about this item

    Keywords

    Bayesian learning; Experimentation; Dynamic agency; Ratchet effect; Regulation; Procurement;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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