Delegating trial and error

Deniz Okat and John G.F. Nash

Journal of Economic Theory, 2024, vol. 217, issue C

Abstract: A principal delegates a problem to an agent. The agent solves the problem by conducting independent trials. Each trial is privately costly and produces the solution with some probability. The principal relies on the agent to report the solution before realizing its benefits. The ability to conceal the solution enables the agent to extract rents from the principal. The optimal contract with commitment balances the agent's rents against the timeliness of the solution, and typically induces the agent to inefficiently idle. The optimal renegotiation-proof contract eliminates idleness, maximizes total surplus, yet cedes significant further rents to the agent. A principal that lacks commitment might optimally slow down problem solving by increasing the time taken to perform trials.

Keywords: Trial and error; Dynamic agency problems; Commitment; Renegotiation (search for similar items in EconPapers)
JEL-codes: D82 D86 O31 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:217:y:2024:i:c:s0022053124000085

DOI: 10.1016/j.jet.2024.105802

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