EconStor >
Federal Reserve Bank of New York >
Staff Reports, Federal Reserve Bank of New York >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/60533
  
Title:Disagreement and learning in a dynamic contracting model PDF Logo
Authors:Adrian, Tobias
Westerfield, Mark M.
Issue Date:2006
Series/Report no.:Staff Report, Federal Reserve Bank of New York 269
Abstract:We present a dynamic contracting model in which the principal and the agent disagree about the resolution of uncertainty, and we illustrate the contract design in an application with Bayesian learning. The disagreement creates gains from trade that the principal realizes by transferring payment to states that the agent considers relatively more likely, a shift that changes incentives. In our dynamic setting, the interaction between incentive provision and learning creates an intertemporal source of “disagreement risk” that alters optimal risk sharing. An endogenous regime shift between economies with small and large belief differences is present, and an early shock to beliefs can lead to large persistent differences in variable pay even after beliefs have converged. Under risk-neutrality, “selling the firm” to the agent does not implement the first-best outcome because it precludes state-contingent trades.
Subjects:dynamic contracts, heterogeneous beliefs, learning, hidden action, principal-agent, continuous time
JEL:D0
D8
G0
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

Files in This Item:
File Description SizeFormat
522101801.pdf329.36 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/60533

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.