Document Type
Discussion Paper
Publication Date
9-1-2009
CFDP Number
1726R3
CFDP Revision Date
2013-06-01
CFDP Pages
156
Abstract
We examine a repeated interaction between an agent, who undertakes experiments, and a principal who provides the requisite funding for these experiments. The repeated interaction gives rise to a dynamic agency cost — the more lucrative is the agent’s stream of future rents following a failure, the more costly are current incentives for the agent, giving the principal an incentive to reduce the continuation value of the project. We characterize the set of recursive Markov equilibria. We show that there are non-Markov equilibria that make the principal better off than the recursive Markov equilibrium, and that may make both players better off. Efficient equilibria front-load the agent’s effort, inducing as much experimentation as possible over an initial period, until making a switch to the worst possible continuation equilibrium. The initial phase concentrates the agent’s effort near the beginning of the project, where it is most valuable, while the eventual switch to the worst continuation equilibrium attenuates the dynamic agency cost.
Recommended Citation
Hörner, Johannes and Samuelson, Larry, "Incentives for Experimenting Agents" (2009). Cowles Foundation Discussion Papers. 2048.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/2048