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Successive Incentives

Author

Listed:
  • Jens Gudmundsson
  • Jens Leth Hougaard
  • Juan D. Moreno-Ternero
  • Lars Peter {O}sterdal

Abstract

We study the design of optimal incentives in sequential processes. To do so, we consider a basic and fundamental model in which an agent initiates a value-creating sequential process through costly investment with random success. If unsuccessful, the process stops. If successful, a new agent thereafter faces a similar investment decision, and so forth. For any outcome of the process, the total value is distributed among the agents using a reward rule. Reward rules thus induce a game among the agents. By design, the reward rule may lead to an asymmetric game, yet we are able to show equilibrium existence with optimal symmetric equilibria. We characterize optimal reward rules that yield the highest possible welfare created by the process, and the highest possible expected payoff for the initiator of the process. Our findings show that simple reward rules invoking short-run incentives are sufficient to meet long-run objectives.

Suggested Citation

  • Jens Gudmundsson & Jens Leth Hougaard & Juan D. Moreno-Ternero & Lars Peter {O}sterdal, 2023. "Successive Incentives," Papers 2311.12494, arXiv.org.
    • Handle: RePEc:arx:papers:2311.12494
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    References listed on IDEAS

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    2. Julien Prat & Benjamin Walter, 2021. "An Equilibrium Model of the Market for Bitcoin Mining," Journal of Political Economy, University of Chicago Press, vol. 129(8), pages 2415-2452.
    3. Jens Leth Hougaard & Juan D. Moreno-Ternero & Lars Peter Østerdal, 2022. "Optimal Management of Evolving Hierarchies," Management Science, INFORMS, vol. 68(8), pages 6024-6038, August.
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