Open AccessDynamic contracts when the agent's quality is unknown
Author(s) -
Prat Julien,
Jovanovic Boyan
Publication year - 2014
Publication title -
theoretical economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.404
H-Index - 32
eISSN - 1555-7561
pISSN - 1933-6837
DOI - 10.3982/te1439
Subject(s) - incentive , quality (philosophy) , action (physics) , term (time) , computer science , microeconomics , principal (computer security) , principal–agent problem , business , economics , computer security , finance , philosophy , epistemology , corporate governance , physics , quantum mechanics
We solve a long‐term contracting problem with symmetric uncertainty about the agent's quality and a hidden action of the agent. As information about quality accumulates, incentives become easier to provide because the agent has less room to manipulate the principal's beliefs. This result is opposite to that in the literature on “career concerns” in which incentives via short‐term contracts become harder to provide as the agent's quality is revealed over time.