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Implementing deterministic outcomes in stochastic dynamic environments

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  • Burguet, Roberto
  • Tseng, Michael C.

Abstract

In noisy environments with adverse selection and moral hazard, dynamic contracts can induce a risk-neutral agent’s actions to deterministically implement any one-shot, incentive-compatible outcome. Thus, dynamic contracts improve upon the static second-best when the principal’s payoff is concave in output, e.g., due to risk aversion or payoff concavity. We bring out a new intuition that applies to both principal–agent and limited commitment settings (such as Kyle, 1985)—in both settings, the informed agent can be induced to reveal all his private information.

Suggested Citation

  • Burguet, Roberto & Tseng, Michael C., 2024. "Implementing deterministic outcomes in stochastic dynamic environments," Economics Letters, Elsevier, vol. 243(C).
    • Handle: RePEc:eee:ecolet:v:243:y:2024:i:c:s016517652400421x
    DOI: 10.1016/j.econlet.2024.111937
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    References listed on IDEAS

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    6. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August.
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    More about this item

    Keywords

    Adverse selection; Moral hazard; Dynamic contracts; Deterministic outputs;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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