Economic Theory

, Volume 19, Issue 3, pp 549–570

The simple analytics of information and experimentation in dynamic agency

  • Thomas D. Jeitschko
  • Leonard J. Mirman
  • Egas Salgueiro
Research Articles

DOI: 10.1007/s001990000156

Cite this article as:
Jeitschko, T., Mirman, L. & Salgueiro, E. Econ Theory (2002) 19: 549. doi:10.1007/s001990000156
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Summary.

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 and Phrases: Bayesian learning, Experimentation, Dynamic agency, Ratchet effect, Regulation, Procurement. 
JEL Classification Numbers: D8, L5, H57. 

Copyright information

© Springer-Verlag Berlin Heidelberg 2002

Authors and Affiliations

  • Thomas D. Jeitschko
    • 1
  • Leonard J. Mirman
    • 2
  • Egas Salgueiro
    • 3
  1. 1.Department of Economics, Michigan State University, East Lansing, MI 48824, USA (e-mail: jeitschk@msu.edu)US
  2. 2.Department of Economics, University of Virginia, Charlottesville, VA 22903, USAUS
  3. 3.S.A.G.E.I., Universidade de Aveiro, 3810–Aveiro, PORTUGALPT

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