The simple analytics of information and experimentation in dynamic agency
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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.
- The simple analytics of information and experimentation in dynamic agency
Volume 19, Issue 3 , pp 549-570
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- Keywords and Phrases: Bayesian learning, Experimentation, Dynamic agency, Ratchet effect, Regulation, Procurement.
- JEL Classification Numbers: D8, L5, H57.
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- Author Affiliations
- A1. Department of Economics, Michigan State University, East Lansing, MI 48824, USA (e-mail: email@example.com), US
- A2. Department of Economics, University of Virginia, Charlottesville, VA 22903, USA, US
- A3. S.A.G.E.I., Universidade de Aveiro, 3810–Aveiro, PORTUGAL, PT