Deterministic versus stochastic contracts in a dynamic principal-agent model

Thomas Schacherer ()
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Thomas Schacherer: Humboldt-Universität zu Berlin

No 2015013, BDPEMS Working Papers from Berlin School of Economics

Abstract: This paper studies stochastic dynamic contracting between a principal and an agent, whose type evolution follows a Markov process. I analyze contracts in which the agent can terminate the contract in every period whereas the principal has full-commitment to her offer. The principal tries to screen the true type of the agent to maximize her profit. Therefore, she wants to incentivize him to reveal his true type. I show that stochastic contracts can never bring about more profits than deterministic contracts for the principal if the first-order approach is valid. For this result, it is immaterial if stochastic contracts depend on earlier realizations of the contract or not.

JEL-codes: J (search for similar items in EconPapers)
Date: 2015-08-12
New Economics Papers: this item is included in nep-cta and nep-mic
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