The simple analytics of information and experimentation in dynamic agency

Leonard Mirman, Thomas Jeitschko and Egas Salgueiro ()

Economic Theory, 2002, vol. 19, issue 3, 549-570

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.

Keywords: Bayesian learning; Experimentation; Dynamic agency; Ratchet effect; Regulation; Procurement. (search for similar items in EconPapers)
JEL-codes: D8 H57 L5 (search for similar items in EconPapers)
Date: 2001-12-20
Note: Received: November 28, 2000; revised version: December 1, 2000
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