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- Title
The simple analytics of information and experimentation in dynamic agency.
- Authors
Jeitschko, Thomas D.; Mirman, Leonard J.; Salgueiro, Egas
- Abstract
The dynamics of a stochastic, two-period principal-agent relationship is studied. The agent's type remains the same over time. Contracts are short term. The principal designs the second contract, taking the information available about the agent after the first period into account. Compared to deterministic environments significant changes emerge: First, fully separating contracts are optimal. Second, the principal has two opposing incentives when designing contracts: the principal 'experiments,' making signals more informative; yet dampens signals, thereby reducing up-front payments. As a result, 'good' agents' targets are ratcheted over time.
- Subjects
RANDOM dynamical systems; CONTRACTS; INDUSTRIAL procurement
- Publication
Economic Theory, 2002, Vol 19, Issue 3, p549
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s001990000156