Implementing deterministic outcomes in stochastic dynamic environments

Roberto Burguet and Michael C. Tseng

Economics Letters, 2024, vol. 243, issue C

Abstract: In noisy environments with adverse selection and moral hazard, dynamic contracts can induce a risk-neutral agent’s actions to deterministically implement any one-shot, incentive-compatible outcome. Thus, dynamic contracts improve upon the static second-best when the principal’s payoff is concave in output, e.g., due to risk aversion or payoff concavity. We bring out a new intuition that applies to both principal–agent and limited commitment settings (such as Kyle, 1985)—in both settings, the informed agent can be induced to reveal all his private information.

Keywords: Adverse selection; Moral hazard; Dynamic contracts; Deterministic outputs (search for similar items in EconPapers)
JEL-codes: D82 D86 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:243:y:2024:i:c:s016517652400421x

DOI: 10.1016/j.econlet.2024.111937

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