Paying and Persuading

Daniel Luo

Papers from arXiv.org

Abstract: I study dynamic contracting where Sender privately observes a Markovian state and seeks to motivate Receiver, who acts. Sender provides incentives in two ways: payments, which alter payoffs ex-post, and (Bayesian) persuasion, which shapes Receiver interim beliefs about payoffs. For all stage game payoffs, discount rates, and Markov transition rules, transfers are a last resort-there is an optimal contract where payments occur only after Sender commits to reveal the state at every continuation history. In an example, the optimal contract is a loyalty program: Sender chooses the static optimal information structure until a random promotion time, after which Sender reveals the state and pays Receiver.

Date: 2025-03, Revised 2025-12
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