publication . Research . Article . Preprint . 2017

Optimal long-term contracting with learning

Zhiguo He; Bin Wei; Jianfeng Yu; Feng Gao;
Open Access English
  • Published: 13 Feb 2017
  • Publisher: Atlanta, GA: Federal Reserve Bank of Atlanta
Abstract
This paper introduces profitability uncertainty into an infinite-horizon variation of the classic Holmstrom and Milgrom (1987) model, and studies optimal dynamic contracting with endogenous learning. The agent's potential belief manipulation leads to the hidden information problem, which makes incentive provisions intertemporally linked in the optimal contract. We reduce the contracting problem into a dynamic programming problem with one state variable, and characterize the optimal contract with an ordinary differential equation. In the benchmark case of Holmstrom and Milgrom (1987) without learning, the optimal effort is constant, and the optimal contract is li...
Subjects
free text keywords: D8, D86, M12, executive compensation, moral hazard, Bayesian learning, hidden information, belief manipulation, private savings, continuous time, stock options, ddc:330, Economics and Econometrics, Accounting, Finance
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publication . Research . Article . Preprint . 2017

Optimal long-term contracting with learning

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