publication . Article . Research . 2017

Optimal Long-term Contracting with Learning

Name: Optimal Long-term Contracting with Learning
Keywords: Economics and Econometrics, Accounting, Finance, D8, D86, M12, Bayesian learning, hidden information, belief manipulation, private savings, continuous time

Feng Gao; Zhiguo He; Bin Wei; Jianfeng Yu;

Open Access

Published: 13 Feb 2017 Journal: SSRN Electronic Journal (eissn: 1556-5068,

Publisher: Elsevier BV

Summary

Abstract

We introduce uncertainty into Holmstrom and Milgrom (1987) to study optimal long-term contracting with learning. In a dynamic relationship, the agent's shirking not only reduces current performance but also increases the agent's information rent due to the persistent belief manipulation effect. We characterize the optimal contract using the dynamic programming technique in which information rent is the unique state variable. In the optimal contract, the optimal effort is front-loaded and decreases stochastically over time. Furthermore, the optimal contract exhibits an option-like feature in that incentives increase after good performance. Implications about mana...

doi: 10.2139/ssrn.1991518 , 10.1093/rfs/hhx007

handle: 10419/172907

Subjects

free text keywords: Economics and Econometrics, Accounting, Finance, D8, D86, M12, Bayesian learning, hidden information, belief manipulation, private savings, continuous time, Executive compensation, Incentive, Dynamic programming, Asset management, business.industry, business, Economics, Microeconomics, State variable, Bayesian inference, Actuarial science, Stock options, Moral hazard, ddc:330

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