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Deterministic versus stochastic contracts in a dynamic principal-agent model

Author

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  • Thomas Mettral

    (Humboldt-Universität zu Berlin)

Abstract

I show that deterministic dynamic contracts between a principal and an agent are always at least as profitable to the principal as stochastic ones if the so-called first-order approach in dynamic mechanism design is satisfied. The principal commits, while the agent-type evolution follows a Markov process. My results demonstrate, even when allowing for potential correlation of stochastic contracts across periods that the usual restriction in the literature to deterministic contracts is admissible, as long as the first-order approach is valid.

Suggested Citation

  • Thomas Mettral, 2018. "Deterministic versus stochastic contracts in a dynamic principal-agent model," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(2), pages 209-218, October.
    • Handle: RePEc:spr:etbull:v:6:y:2018:i:2:d:10.1007_s40505-018-0136-9
    DOI: 10.1007/s40505-018-0136-9
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    References listed on IDEAS

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    1. Strausz, Roland, 2006. "Deterministic versus stochastic mechanisms in principal-agent models," Journal of Economic Theory, Elsevier, vol. 128(1), pages 306-314, May.
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    More about this item

    Keywords

    Contract theory; Principal-agent theory; Dynamic contracting;
    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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