Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/51648
Authors: 
Prat, Julien
Jovanovic, Boyan
Year of Publication: 
2010
Series/Report no.: 
Discussion paper series // Forschungsinstitut zur Zukunft der Arbeit 5323
Abstract: 
We analyze a long-term contracting problem involving common uncertainty about a parameter capturing the productivity of the relationship, and featuring a hidden action for the agent. We develop an approach that works for any utility function when the parameter and noise are normally distributed and when the effort and noise affect output additively. We then analytically solve for the optimal contract when the agent has exponential utility. We find that the Pareto frontier shifts out as information about the agent's quality improves. In the standard spot-market setup, by contrast, when the parameter measures the agent's quality, the Pareto frontier shifts inwards with better information. Commitment is therefore more valuable when quality is known more precisely. Incentives then are easier to provide because the agent has less room to manipulate the beliefs of the principal. Moreover, in contrast to results under one-period commitment, wage volatility declines as experience accumulates.
Subjects: 
principal-agent model
optimal contract
learning
private information
reputation
career
JEL: 
D82
D83
E24
J41
Document Type: 
Working Paper

Files in This Item:
File
Size
508.48 kB





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