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  3. American Economic Journal: Microeconomics
  4. November 2019
  5. Dynamic Non-monetary Incentives

Dynamic Non-monetary Incentives

  • Daniel Bird
  • Alexander Frug
American Economic Journal: Microeconomics
vol. 11, no. 4, November 2019
(pp. 111-50)
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Abstract

We study a principal-agent interaction where investments and rewards arrive stochastically over time and are privately observed by the agent. Investments (costly for the agent, beneficial for the principal) can be concealed by the agent. Rewards (beneficial for the agent, costly for the principal) can be forbidden by the principal. We ask how rewards should be used and which investments incentivized. We identify the unique optimal mechanism and analyze the dynamic investment and compensation policies. When all rewards are identical, the unique optimal way to provide incentives is by a "carte blanche" to pursue all rewards arriving in a predetermined time frame.

Citation

Bird, Daniel, and Alexander Frug. 2019. "Dynamic Non-monetary Incentives." American Economic Journal: Microeconomics, 11 (4): 111-50. DOI: 10.1257/mic.20170025

Additional Materials

JEL Classification

  • D82 Asymmetric and Private Information; Mechanism Design
  • M52 Personnel Economics: Compensation and Compensation Methods and Their Effects
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