publication . Article . Research . 2017

Optimal Long-term Contracting with Learning

Feng Gao; Zhiguo He; Bin Wei; Jianfeng Yu;
Open Access
  • Published: 13 Feb 2017 Journal: SSRN Electronic Journal (eissn: 1556-5068, Copyright policy)
  • Publisher: Elsevier BV
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...
free text keywords: D8, D86, M12, Bayesian learning, hidden information, belief manipulation, private savings, continuous time, Economics and Econometrics, Accounting, Finance, 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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