Dynamic Reward Design

Yijun Liu

Papers from arXiv.org

Abstract: This paper studies a dynamic screening model in which a principal hires an agent with limited liability. The agent's private cost of working is an i.i.d. draw from a continuous distribution. His working status is publicly observable. The limited liability constraint requires that payments remain nonnegative at all times. In this setting, despite costs being i.i.d. and the payoffs being additively separable across periods, the optimal mechanism does not treat each period independently. Instead, it features backloading payments and requires the agent to work in consecutive periods. Specifically, I characterize conditions under which the optimal mechanism either grants the agent flexibility to start working in any period or restricts the starting period to the first. In either case, once the agent begins working, he is incentivized to work consecutively until the end.

Date: 2025-11
New Economics Papers: this item is included in nep-cta, nep-des and nep-mic
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