Sun, Ching-jen (2007): A Note on the Dynamics of Incentive Contracts.
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Laffont and Tirole  show that when the uncertainty about the agent's ability is small, the equilibrium must involve a large amount of pooling, but it is not necessary to be a partition equilibrium. They construct a nonpartition continuation equilibrium for a given first-period menu of contracts and conjecture that this continuation equilibrium need not be suboptimal for the whole game under small uncertainty. We show that, irrespective of the amount of uncertainty, this nonpartition continuation equilibrium generates a smaller payoff for the principal than a different menu of contracts with a partition continuation equilibrium. In this sense, Laffont and Tirole's menu of contracts, giving rise to a nonpartition continuation equilibrium, is not optimal. An intuition behind this result is provided that may shed some light on the problem of dynamic contracting without commitment.
|Item Type:||MPRA Paper|
|Original Title:||A Note on the Dynamics of Incentive Contracts|
|Keywords:||Incentive Contracts; Dynamic Contracting; Commitment; Partition Equilibrium; Ratchet Effect; Bunching|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory
L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation
|Depositing User:||Ching-jen Sun|
|Date Deposited:||05. Aug 2008 00:37|
|Last Modified:||14. Mar 2015 10:57|
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