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Incentives for Experimenting Agents

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.

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File URL: http://cowles.econ.yale.edu/P/cd/d17a/d1726.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1726.

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Length: 65 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:cwl:cwldpp:1726
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Web page: http://cowles.econ.yale.edu/
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Keywords: Experimentation; Learning; Agency; Dynamic agency; Venture capital; Repeated principal-agent problem;

Find related papers by JEL classification:

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

This paper has been announced in the following NEP Reports:

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  1. Gerardi, Dino & Maestri, Lucas, 2012. "A principal-agent model of sequential testing," Theoretical Economics, Econometric Society, vol. 7(3), September.
  2. Carine Peeters & Bruno Van Pottelsberghe, 2003. "Measuring innovation competencies and performances: a survey of large firms in Belgium," Working Papers CEB 04-005.RS, ULB -- Universite Libre de Bruxelles.
  3. Doepke, Matthias & Townsend, Robert M, 2004. "Dynamic Mechanism Design with Hidden Income and Hidden Auctions," CEPR Discussion Papers 4455, C.E.P.R. Discussion Papers.
  4. Dirk Bergemann & Ulrich Hege & Liang Peng, 2008. "Venture Capital and Sequential Investments," Cowles Foundation Discussion Papers 1682, Cowles Foundation for Research in Economics, Yale University, revised Nov 2008.
  5. Asher Blass & Oved Yosha, 2003. "Financing R&D in mature companies: An empirical analysis," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 12(5), pages 425-447.
  6. Bergemann, Dirk & Hege, Ulrich, 1997. "Venture Capital Financing, Moral Hazard and Learning," CEPR Discussion Papers 1738, C.E.P.R. Discussion Papers.
  7. Francesca Cornelli & Oved Yosha, 2003. "Stage Financing and the Role of Convertible Securities," Review of Economic Studies, Oxford University Press, vol. 70(1), pages 1-32.
  8. Dirk Bergemann & Ulrich Hege, 2001. "The Financing of Innovation: Learning and Stopping," Cowles Foundation Discussion Papers 1292, Cowles Foundation for Research in Economics, Yale University.
  9. Francesca Cornelli & Oved Yosha, 2003. "Stage Financing and the Role of Convertible Securities," Review of Economic Studies, Wiley Blackwell, vol. 70(1), pages 1-32, January.
  10. Mason, Robin & Välimäki, Juuso, 2008. "Dynamic Moral Hazard and Project Completion," CEPR Discussion Papers 6857, C.E.P.R. Discussion Papers.
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