Grouping agents with persistent types

James M. Malcomson

Games and Economic Behavior, 2025, vol. 152, issue C, 150-174

Abstract: Employees are divided into grades. Toyota places suppliers into only a small number of categories. This paper shows that grouping of privately informed and persistent agent types arises naturally in relational incentive contracts when agent type is continuous. Malcomson (2016) showed that full separation is not possible if, following full revelation of an agent's type, payoffs for principal and agent are on the Pareto frontier. This paper shows how much separation can be achieved. Specifically, it characterizes the finest partitioning that can be achieved in each period with agent types for which first-best effort is unattainable. Separation may take time, with initial coarser partitions being subsequently refined, but does not continue indefinitely. When it stops, there remain a finite number of groups of agent types. Numerical illustrations for constant elasticity cost of effort show the maximum number is typically small despite agent type being continuous.

Keywords: Relational incentive contracts; Persistent private information; Renegotiation-proofness; Type pooling (search for similar items in EconPapers)
JEL-codes: C73 D82 D86 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:152:y:2025:i:c:p:150-174

DOI: 10.1016/j.geb.2025.03.008

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