Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60533
Year of Publication: 
2006
Series/Report no.: 
Staff Report No. 269
Publisher: 
Federal Reserve Bank of New York, New York, NY
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

Files in This Item:
File
Size
329.36 kB





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