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Dynamic nonmonetary incentives

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Abstract

We study a principal-agent interaction where investments and rewards arrive stochastically over time, and are privately observed by the agent. Investments (costly for the agent, beneficial for the principal) can be concealed by the agent. Rewards (beneficial for the agent, costly for the principal) can be forbidden by the principal. We ask how rewards should be used and which investments incentivized. We identify the unique optimal mechanism and analyze the dynamic investment and compensation policies. When all rewards are identical, the unique optimal way to provide incentives is by a "carte-blanche" to pursue all rewards arriving in a predetermined timeframe.

Suggested Citation

  • Daniel Bird & Alexander Frug, 2016. "Dynamic nonmonetary incentives," Economics Working Papers 1545, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:1545
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    1. Alexander Frankel, 2014. "Aligned Delegation," American Economic Review, American Economic Association, vol. 104(1), pages 66-83, January.
    2. Spear, Stephen E. & Wang, Cheng, 2005. "When to fire a CEO: optimal termination in dynamic contracts," Journal of Economic Theory, Elsevier, vol. 120(2), pages 239-256, February.
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    Cited by:

    1. Daniel Bird & Alexander Frug, 2021. "Optimal Contracts with Randomly Arriving Tasks," The Economic Journal, Royal Economic Society, vol. 131(637), pages 1905-1918.
    2. Lipnowski, Elliot & Ramos, João, 2020. "Repeated delegation," Journal of Economic Theory, Elsevier, vol. 188(C).
    3. Chen, Yi, 2022. "Dynamic delegation with a persistent state," Theoretical Economics, Econometric Society, vol. 17(4), November.
    4. Rantakari, Heikki, 2023. "How to reward honesty?," Journal of Economic Behavior & Organization, Elsevier, vol. 207(C), pages 129-145.
    5. Daniel Bird & Alexander Frug, 2019. "Monotone contracts," Economics Working Papers 1647, Department of Economics and Business, Universitat Pompeu Fabra.
    6. Spear, Stephen E. & Wang, Cheng, 2005. "When to fire a CEO: optimal termination in dynamic contracts," Journal of Economic Theory, Elsevier, vol. 120(2), pages 239-256, February.
    7. Siemroth, Christoph, 2022. "Ending Wasteful Year-End Spending: On Optimal Budget Rules in Organizations," Economics Discussion Papers 32231, University of Essex, Department of Economics.
    8. Matthew Mitchell, 2018. "Free (Ad)vice," 2018 Meeting Papers 1194, Society for Economic Dynamics.
    9. Forand, Jean Guillaume & Zapal, Jan, 2020. "Production priorities in dynamic relationships," Theoretical Economics, Econometric Society, vol. 15(3), July.

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    More about this item

    Keywords

    Dynamic mechanism design; Uncertain action availability.;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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