Optimal Long-Term Contracting with Learning

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

No 2016-10, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

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 decreases stochastically 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.

Keywords: executive compensation; moral hazard; Bayesian learning; hidden information; belief manipulation; private savings; continuous time; stock options (search for similar items in EconPapers)
JEL-codes: D8 D86 M12 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2016-11-01
New Economics Papers: this item is included in nep-hrm and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.frbatlanta.org/-/media/Documents/resea ... rning-2016-11-09.pdf Full text (application/pdf)

Related works:
Journal Article: Optimal Long-Term Contracting with Learning (2017)
Working Paper: Optimal Long-term Contracting with Learning (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedawp:2016-10

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta Contact information at EDIRC.
Bibliographic data for series maintained by Rob Sarwark ().