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Restless Contracting

Author

Listed:
  • Can Urgun

    (Princeton University)

Abstract

I explore how a principal dynamically chooses among multiple agents to utilize for production. The principal chooses at most one agent to utilize in every period affecting the states of the agents. A utilized agent changes its state because it is utilized, but the nonutilized agents do not remain at rest: they also change their state. The analysis requires a novel methodological approach: the agency problem that the principal faces with each agent is shown to be an appropriately designed restless bandit, creating a multiarmed restless bandit. The optimal contract is characterized by an index rule for the restless bandit.

Suggested Citation

  • Can Urgun, 2021. "Restless Contracting," Working Papers 2021-88, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2021-88
    as

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    File URL: https://scholar.princeton.edu/sites/default/files/curgun/files/6bssyxyr_restlesscontractsgeneralmodelv1_edited_final.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Relational Contracts; Restless Bandits; Dynamic Contracting;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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