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Dynamic Incentive Contracts with Uncorrelated Private Information and History Dependent Outcomes

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In existing papers on dynamic incentive contracts, the dynamic structure of the principal-agent relationship arises exclusively from the ability of the principal to learn about the hidden information over time. In this paper we deal with a different source of dynamics, which is considered standard in all areas of economics other than the information literature: we study situations where current opportunities depend on past and current actions, notwithstanding any information conveyed by the actions. Standard examples include investment "Learning by doing" and R&D. In order to focus on this neglected source of dynamics, we restrict our attention to situation involving asymmetric information in each period, but without any intertemporal informational correlation, so that no dynamic effect arises from informational asymmetries directly. This make comparisons with static result both easier and more interesting. La dynamique des modèles actuels des contrats incitatifs provient de la capacité du principal, à partir des actions observées dans le présent d'apprendre quelque chose sur l'information qui ne lui sera pas directement accessible dans le futur. Nous étudions ici une autre source de dynamique, négligée dans la littérature sur l'information mais standard dans toutes les autres branches de la science économique, et qui résulte du fait que les actions courantes définissent les opportunités futures. C'est ce qui se passe lorsqu'il y a investissement, apprentissage, R&D, etc.. Pour bien identifier les propriétés dynamiques résultant de ce type de situations dans les modèles de principal-agent avec information asymétrique, nous nous en tenons à des modèles où il n'y a aucune corrélation entre information présente et information future, si bien qu'aucun effet dynamique ne résulte directement de l'asymétrie d'information.

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Paper provided by Université du Québec à Montréal, Département des sciences économiques in its series Cahiers de recherche du Département des sciences économiques, UQAM with number 9302.

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Date of creation: Feb 1993
Publication status: published in Japanese Economic Review, 47(4), 1996, 321-34
Handle: RePEc:cre:uqamwp:9302
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  1. Baron, David P., 1989. "Design of regulatory mechanisms and institutions," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 24, pages 1347-1447 Elsevier.
  2. Laffont, Jean-Jacques & Tirole, Jean, 1988. "The Dynamics of Incentive Contracts," Econometrica, Econometric Society, vol. 56(5), pages 1153-1175, September.
  3. Gaudet, Gerard & Lassere, Pierre & Long, Ngo Van, 1995. "Optimal Resource Royalties with Unknown and Temporally Independent Extraction Cost Structures," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(3), pages 715-749, August.
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