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research articles : The simple analytics of information and experimentation in dynamic agency

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Author Info
Leonard J. Mirman (Department of Economics, University of Virginia, Charlottesville, VA 22903, USA)
Thomas D. Jeitschko () (Department of Economics, Michigan State University, East Lansing, MI 48824, USA)
Egas Salgueiro (S.A.G.E.I., Universidade de Aveiro, 3810-Aveiro, PORTUGAL)

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Abstract

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.

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Publisher Info
Article provided by Springer in its journal Economic Theory.

Volume (Year): 19 (2002)
Issue (Month): 3 ()
Pages: 549-570
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Handle: RePEc:spr:joecth:v:19:y:2002:i:3:p:549-570

Note: Received: November 28, 2000; revised version: December 1, 2000
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Related research
Keywords: Bayesian learning; Experimentation; Dynamic agency; Ratchet effect; Regulation; Procurement.;

Find related papers by JEL classification:
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
L5 - Industrial Organization - - Regulation and Industrial Policy
H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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