Optimal Long-Term Contracting with Learning

Zhiguo He (), Bin Wei, Jianfeng Yu and Feng Gao

The Review of Financial Studies, 2017, vol. 30, issue 6, 2006-2065

Abstract: We introduce uncertainty into Holmstrom and Milgrom (1987) to study optimal long-term contracting with learning. In a dynamic relationship, the agent’s shirking not only reduces current performance, but also increases the agent’s information rent due to the persistent belief manipulation effect. We characterize the optimal contract using the dynamic programming technique in which information rent is the unique state variable. In the optimal contract, the optimal effort is front-loaded and stochastically decreases over time. Furthermore, the optimal contract exhibits an option-like feature in that incentives increase after good performance. Implications about managerial incentives and asset management compensations are discussed.

JEL-codes: D82 D83 E24 J41 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (25)

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Working Paper: Optimal Long-Term Contracting with Learning (2016)
Working Paper: Optimal Long-term Contracting with Learning (2012)
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