American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Implications of Unequal Discounting in Dynamic Contracting
American Economic Journal: Microeconomics
vol. 15,
no. 1, February 2023
(pp. 638–92)
Abstract
This paper studies a canonical dynamic screening problem where the agent has Markovian private information and limited commitment and the principal and the agent have different discount factors. Unequal discounting captures unequal access to capital markets. In comparison to standard models of dynamic mechanism design, the principal no longer finds it optimal to maximally back-load the agent's information rents: a new force of intertemporal cost of incentive provision pushes toward front-loading agents' payoffs. The optimal contract settles into a cycle with infinite memory. The introduction of unequal discounting renders the standard relaxed-problem approach invalid for certain parameters. A simple and approximately optimal contract is then provided.Citation
Krasikov, Ilia, Rohit Lamba, and Thomas Mettral. 2023. "Implications of Unequal Discounting in Dynamic Contracting." American Economic Journal: Microeconomics, 15 (1): 638–92. DOI: 10.1257/mic.20200427Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- D61 Allocative Efficiency; Cost-Benefit Analysis
- D82 Asymmetric and Private Information; Mechanism Design
- D86 Economics of Contract: Theory
- L14 Transactional Relationships; Contracts and Reputation; Networks
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