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Incentives for Experimenting Agents

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Abstract

We examine a repeated interaction between an agent, who undertakes experiments, and a principal who provides the requisite funding for these experiments. The agent's actions are hidden, and the principal, who makes the offers, cannot commit to future actions. We identify the unique Markovian equilibrium (whose structure depends on the parameters) and characterize the set of all equilibrium payoffs, uncovering a collection of non-Markovian equilibria that can Pareto dominate and reverse the qualitative properties of the Markovian equilibrium. The prospect of lucrative continuation payoffs makes it more expensive for the principal to incentivize the agent, giving rise to a dynamic agency cost. As a result, constrained efficient equilibrium outcomes call for nonstationary outcomes that front-load the agent's effort and that either attenuate or terminate the relationship inefficiently early.

Suggested Citation

  • Johannes Horner & Larry Samuelson, 2009. "Incentives for Experimenting Agents," Cowles Foundation Discussion Papers 1726, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1726
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    Citations

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    Cited by:

    1. Fahad Khalil & Jacques Lawarree & Alexander Rodivilov, 2018. "Learning from Failures: Optimal Contract for Experimentation and Production," CESifo Working Paper Series 7310, CESifo Group Munich.
    2. Terstiege, Stefan, 2014. "Private versus verifiable interim performance evaluations under uncertainty," Economics Letters, Elsevier, vol. 123(3), pages 341-344.
    3. Heidhues, Paul & Rady, Sven & Strack, Philipp, 2015. "Strategic experimentation with private payoffs," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 531-551.
    4. repec:aea:aejmic:v:9:y:2017:i:3:p:148-86 is not listed on IDEAS
    5. Klein, Nicolas, 2016. "The importance of being honest," Theoretical Economics, Econometric Society, vol. 11(3), September.
    6. Juanjuan Zhang, 2016. "Deadlines in Product Development," Management Science, INFORMS, vol. 62(11), pages 3310-3326, November.
    7. Forand, Jean Guillaume, 2015. "Keeping your options open," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 47-68.
    8. repec:wly:econjl:v:128:y:2018:i:611:p:1367-1394 is not listed on IDEAS
    9. Chia-Hui Chen & Junichiro Ishida, 2017. "Rewarding Mediocrity? Optimal Regulation of R&D Markets with Reputation Concerns," ISER Discussion Paper 0994, Institute of Social and Economic Research, Osaka University.
    10. Helmut Bester & Matthias Dahm, 2018. "Credence Goods, Costly Diagnosis and Subjective Evaluation," Economic Journal, Royal Economic Society, vol. 128(611), pages 1367-1394, June.
    11. Gomes, Renato & Gottlieb, Daniel & Maestri, Lucas, 2016. "Experimentation and project selection: Screening and learning," Games and Economic Behavior, Elsevier, vol. 96(C), pages 145-169.
    12. Bhaskar, Venkataraman, 2012. "Dynamic Moral Hazard, Learning and Belief Manipulation," CEPR Discussion Papers 8948, C.E.P.R. Discussion Papers.
    13. Chia-Hui Chen & Junichiro Ishida, 2015. "A Tenure-Clock Problem," ISER Discussion Paper 0919, Institute of Social and Economic Research, Osaka University.
    14. Weng, Xi, 2015. "Dynamic pricing in the presence of individual learning," Journal of Economic Theory, Elsevier, vol. 155(C), pages 262-299.
    15. Catherine Bobtcheff & Raphaël Levy, 2017. "More Haste, Less Speed? Signaling through Investment Timing," American Economic Journal: Microeconomics, American Economic Association, vol. 9(3), pages 148-186, August.
    16. repec:bla:jindec:v:66:y:2018:i:2:p:377-422 is not listed on IDEAS
    17. Bhaskar, Venkataraman, 2014. "The Ratchet Effect Re-examined: A Learning Perspective," CEPR Discussion Papers 9956, C.E.P.R. Discussion Papers.
    18. Besanko, David & Tong, Jian & Wu, Jianjun, 2016. "Subsidizing research programs with "if" and "when" uncertainty in the face of severe informational constraints," Discussion Paper Series In Economics And Econometrics 1605, Economics Division, School of Social Sciences, University of Southampton.
    19. Chia‐Hui Chen & Junichiro Ishida, 2018. "Dynamic performance evaluation with deadlines: The role of commitment," Journal of Industrial Economics, Wiley Blackwell, vol. 66(2), pages 377-422, June.

    More about this item

    Keywords

    Experimentation; Learning; Agency; Dynamic agency; Venture capital; Repeated principal-agent problem;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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