Endogenizing Private Information: Incentive Contracts under Learning By Doing
This paper investigates the design of incentives in a dynamic adverse selection framework when agentsï¿½ production technologies display learning effects and agentsï¿½ rate of learning is private knowledge. In a simple two-period model with full commitment available to the principal, we show that whether learning effects are over- or under-exploited crucially depends on whether learning effects increase or decrease the principalï¿½s uncertainty about agentsï¿½ costs of production. Hence, what drives the over- or under-exploitation of learning effects is whether more efficient agents also learn faster (so costs diverge through learning effects) or whether it is the less efficient agents who learn faster (so costs converge). Furthermore, we show that if divergence in costs through learning effects is strong enough, learning effects will not be exploited at all, in a sense to be made precise.
|Date of creation:||Sep 2004|
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