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Dynamic contracting: an irrelevance theorem

Author

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  • Eső, Péter
  • Szentes, Balázs

Abstract

This paper generalizes a conceptual insight in dynamic contracting with quasilinear payoffs: the principal does not need to pay any information rents for extracting the agent's “new” private information obtained after signing the contract. This is shown in a general model in which the agent's type stochastically evolves over time, and her payoff (which is linear in transfers) depends on the entire history of private and any contractible information, contractible decisions, and her hidden actions. The contract is offered by the principal in the presence of initial informational asymmetry. The model can be transformed into an equivalent one where the agent's subsequent information is independent in each period (type orthogonalization). We show that for any fixed decision–action rule implemented by a mechanism, the agent's rents (as well as the principal's maximal revenue) are the same as if the principal could observe and contract on the agent's orthogonalized types after the initial period. We also show that any monotonic decision–action rule can be implemented in a Markovian environment satisfying certain regularity conditions, and we provide a simple “recipe” for solving such dynamic contracting problems.

Suggested Citation

  • Eső, Péter & Szentes, Balázs, 2017. "Dynamic contracting: an irrelevance theorem," LSE Research Online Documents on Economics 69403, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:69403
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    File URL: http://eprints.lse.ac.uk/69403/
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    Citations

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    Cited by:

    1. Arve, Malin & Zwart, Gijsbert, 2023. "Optimal procurement and investment in new technologies under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
    2. Asseyer, Andreas, 2018. "Optimal monitoring in dynamic procurement contracts," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 222-252.
    3. Hao Li & Xianwen Shi, 2017. "Discriminatory Information Disclosure," American Economic Review, American Economic Association, vol. 107(11), pages 3363-3385, November.
    4. Kiho Yoon, 2021. "The Uniqueness of Dynamic Groves Mechanisms on Restricted Domains," Korean Economic Review, Korean Economic Association, vol. 37, pages 263-285.
    5. Lu, Jingfeng & Wang, Zijia, 2021. "Optimal selling mechanisms with buyer price search," Journal of Economic Theory, Elsevier, vol. 196(C).
    6. Alex Smolin, 2023. "Disclosure and pricing of attributes," RAND Journal of Economics, RAND Corporation, vol. 54(4), pages 570-597, December.
    7. Hayashi, Takashi & Lombardi, Michele, 2019. "One-step-ahead implementation," Journal of Mathematical Economics, Elsevier, vol. 83(C), pages 110-126.
    8. Rahul Deb & Mallesh M. Pai & Maher Said, 2018. "Evaluating Strategic Forecasters," American Economic Review, American Economic Association, vol. 108(10), pages 3057-3103, October.
    9. Rohit Lamba, 2022. "Efficiency with(out) intermediation in repeated bilateral trade," Papers 2202.04201, arXiv.org.
    10. Zwart, Gijsbert, 2021. "Optimal regulation of energy network expansion when costs are stochastic," Journal of Economic Dynamics and Control, Elsevier, vol. 126(C).
    11. Krähmer, Daniel & Strausz, Roland, 2022. "Dynamic Screening with Verifiable Bankruptcy," Rationality and Competition Discussion Paper Series 348, CRC TRR 190 Rationality and Competition.
    12. Krasikov, Ilia & Lamba, Rohit, 2021. "A theory of dynamic contracting with financial constraints," Journal of Economic Theory, Elsevier, vol. 193(C).
    13. Roland Strausz, 2024. "Correlation‐savvy sellers," RAND Journal of Economics, RAND Corporation, vol. 55(2), pages 266-291, June.
    14. Liu, Bin & Liu, Dongri & Lu, Jingfeng, 2020. "Shifting supports in Esö and Szentes (2007)," Economics Letters, Elsevier, vol. 193(C).
    15. Vitali Gretschko & Martin Pollrich, 2022. "Incomplete Contracts in Multi-period Procurement," Management Science, INFORMS, vol. 68(7), pages 5146-5161, July.
    16. Chifeng Dai, 2021. "Optimal sequential contract with a risk‐averse supplier," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(1), pages 92-125, February.
    17. Emil Temnyalov, 2019. "Points mechanisms and rewards programs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 28(3), pages 436-457, June.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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