Results 1  10
of
12
Dynamic Mechanism Design: A Myersonian Approach
, 2013
"... We study mechanism design in dynamic quasilinear environments where private information arrives over time and decisions are made over multiple periods. Our
rst main result is a necessary condition for incentive compatibility that takes the form of an envelope formula for the derivative of an agents ..."
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Cited by 21 (5 self)
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We study mechanism design in dynamic quasilinear environments where private information arrives over time and decisions are made over multiple periods. Our
rst main result is a necessary condition for incentive compatibility that takes the form of an envelope formula for the derivative of an agents equilibrium expected payo ¤ with respect to his current type. It combines the familiar marginal e¤ect of types on payo¤s with novel marginal e¤ects of the current type on future ones that are captured by impulse response functions.The formula yields an expression for dynamic virtual surplus which is instrumental to the design of optimal mechanisms, and to the study of distortions under such mechanisms. Our second main result gives transfers that satisfy the envelope formula, and establishes a sense in which they are pinned down by the allocation rule (revenue equivalence). Our third main result is a characterization of PBEimplementable allocation rules in Markov environments, which yields tractable su ¢ cient conditions that facilitate novel applications. We illustrate the results by applying them to the design of optimal mechanisms for the sale of experience goods (bandit auctions).
Dynamic Mechanism Design: Incentive Compatibility, Profit Maximization and Information Disclosure
, 2009
"... We examine the design of incentivecompatible screening mechanisms for dynamic environments in which the agents’ types follow a (possibly nonMarkov) stochastic process, decisions may be made over time and may affect the type process, and payoffs need not be timeseparable. We derive a formula for t ..."
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Cited by 16 (0 self)
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We examine the design of incentivecompatible screening mechanisms for dynamic environments in which the agents’ types follow a (possibly nonMarkov) stochastic process, decisions may be made over time and may affect the type process, and payoffs need not be timeseparable. We derive a formula for the derivative of an agent’s equilibrium payoff with respect to his current type in an incentivecompatible mechanism, which summarizes all firstorder conditions for incentive compatibility and generalizes Mirrlees’s envelope formula of static mechanism design. We provide conditions on the environment under which this formula must hold in any incentivecompatible mechanism. When specialized to quasilinear environments, this formula yields a dynamic “revenueequivalence” result and an expression for dynamic virtual surplus, which is instrumental for the design of optimal mechanisms. We also provide some sufficient conditions for incentive compatibility, and for its robustness to an agent’s observation of the other agents’ past and future types. We apply these results to a number of novel settings, including the design of profitmaximizing auctions and durablegood selling mechanisms for buyers whose values follow an AR(k) process.
Tractability in Incentive Contracting
, 2010
"... This paper identifies a class of multiperiod agency problems in which the optimal contract is tractable (attainable in closed form). By modeling the noise before the action in each period, we force the contract to provide correct incentives statebystate, rather than merely on average. This tightly ..."
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Cited by 12 (5 self)
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This paper identifies a class of multiperiod agency problems in which the optimal contract is tractable (attainable in closed form). By modeling the noise before the action in each period, we force the contract to provide correct incentives statebystate, rather than merely on average. This tightly constrains the set of admissible contracts and allows for a simple solution to the contracting problem. Our results continue to hold in continuous time, where noise and actions are simultaneous. We thus extend the tractable contracts of Holmstrom and Milgrom (1987) to settings that do not require exponential utility, a pecuniary cost of effort, Gaussian noise or continuous time. The contract’s functional form is independent of the noise distribution. Moreover, if the cost of effort is pecuniary (multiplicative), the contract is linear (loglinear) in output and its slope is independent of the noise distribution, utility function and reservation utility.
Managerial Turnover in a Changing World
"... We characterize a …rm’s pro…tmaximizing turnover policy in an environment where managerial productivity changes stochastically over time and is the managers’private information. Our key positive result shows that the productivity level that the …rm requires for retention declines with the managers’ ..."
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Cited by 10 (3 self)
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We characterize a …rm’s pro…tmaximizing turnover policy in an environment where managerial productivity changes stochastically over time and is the managers’private information. Our key positive result shows that the productivity level that the …rm requires for retention declines with the managers’tenure in the …rm. Our key normative result shows that, compared to what is e ¢ cient, the pro…tmaximizing policy either induces excessive retention (i.e., ine ¢ ciently low turnover) at all tenure levels, or excessive …ring at the early stages of the relationship followed by excessive retention after su ¢ ciently long tenure. JEL classi…cation: D82
Calibrated Incentive Contracts
, 2011
"... This paper studies a dynamic agency problem which includes limited liability, moral hazard and adverse selection. The paper develops a robust approach to dynamic contracting based on calibrating the payoffs that would have been delivered by simple benchmark contracts that are attractive but infeasib ..."
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Cited by 9 (4 self)
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This paper studies a dynamic agency problem which includes limited liability, moral hazard and adverse selection. The paper develops a robust approach to dynamic contracting based on calibrating the payoffs that would have been delivered by simple benchmark contracts that are attractive but infeasible, due to limited liability constraints. The resulting dynamic contracts are detailfree and satisfy robust performance bounds independently of the underlying process for returns, which need not be i.i.d. or even ergodic. 1
RenegotiationProof Contracts with Moral Hazard and Persistent Private Information
, 2011
"... How does renegotiation affect contracts between a principal and an agent subject to persistent private information and moral hazard? This paper introduces a concept of renegotiationproofness, which adapts to stochastic games the concepts of weak renegotiationproofness and internal consistency by ex ..."
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Cited by 8 (4 self)
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How does renegotiation affect contracts between a principal and an agent subject to persistent private information and moral hazard? This paper introduces a concept of renegotiationproofness, which adapts to stochastic games the concepts of weak renegotiationproofness and internal consistency by exploiting natural comparisons across states. When the agent has exponential utility and cost of effort, each separating renegotiationproof contract is characterized by a single “sensitivity ” parameter, which determines how the agent’s promised utility varies with reported cash flows. The optimal contract among those always causes immiserization. Reducing the agent’s cost of effort can harm the principal by increasing the tension between moral hazard and reporting problems. Truthfulness of the constructed contracts is obtained by allowing jumps in cash flow reports and turning the agent’s reporting problem into an impulse control problem. This approach shows that selfcorrecting reports are optimal off the equilibrium path. The paper also discusses the case of partially pooling contracts and of permanent outside options for the agent, illustrating the interaction between cashflow persistence, renegotiation, moral hazard, and information revelation.
Dynamic CEO Compensation
"... We study optimal compensation in a dynamic framework where the CEO consumes in multiple periods, can undo the contract by privately saving, and can temporarily in‡ate earnings. We obtain a simple closedform contract that yields clear predictions for how the level and performance sensitivity of pay ..."
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Cited by 1 (0 self)
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We study optimal compensation in a dynamic framework where the CEO consumes in multiple periods, can undo the contract by privately saving, and can temporarily in‡ate earnings. We obtain a simple closedform contract that yields clear predictions for how the level and performance sensitivity of pay vary over time and across …rms. The contract can be implemented by escrowing the CEO’s pay into a "Dynamic Incentive Account " that comprises cash and the …rm’s equity. The account features statedependent rebalancing to ensure its equity proportion is always su ¢ cient to induce e¤ort, and timedependent vesting to deter shorttermism.
ScienceDirect A theory of political and economic cycles
"... Abstract We develop a theoretical framework in which political and economic cycles are jointly determined. These cycles are driven by three political economy frictions: policymakers are nonbenevolent, they cannot commit to policies, and they have private information about the tightness of the gove ..."
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Abstract We develop a theoretical framework in which political and economic cycles are jointly determined. These cycles are driven by three political economy frictions: policymakers are nonbenevolent, they cannot commit to policies, and they have private information about the tightness of the government budget and rents. Our first main result is that, in the most favorable equilibrium to the households, distortions to production emerge and never disappear even in the long run. This result is driven by the interaction of limited commitment and private information on the side of the policymaker, since in the absence of either friction, there are no long run distortions to production. Our second result is that, if the variance of private information is sufficiently large, there is equilibrium turnover in the long run so that political cycles never disappear. Finally, our model produces a long run distribution of taxes, distortions, and turnover, where these all respond persistently to temporary economic shocks.
Northwestern University
, 2012
"... We study the design of incentivecompatible mechanisms in general dynamic environments where information arrives gradually over time and decisions are made over multiple periods. Our first main result is a necessary condition for incentive compatibility that takes the form of an envelope formula for ..."
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We study the design of incentivecompatible mechanisms in general dynamic environments where information arrives gradually over time and decisions are made over multiple periods. Our first main result is a necessary condition for incentive compatibility that takes the form of an envelope formula for the derivative of an agent’s equilibrium expected payoff with respect to his current type. It combines the familiar marginal effects of types on payoffs with novel marginal effects of current types on future ones captured by the “impulse response functions.”The envelope formula yields an expression for dynamic virtual surplus which is instrumental to the design of optimal mechanisms and to the study of the dynamics of distortions under such mechanisms. We construct transfers that guarantee that the formula is satisfied at all histories and qualify in what sense they are pinned down by the allocation rule (“revenue equivalence”). Our second main result is a characterization of PBEimplementable allocation rules in Markov environments, which yields suffi cient conditions that are applicable also to some nonMarkov environments. We illustrate the results by applying them to the design of novel mechanisms for the sale of experience goods (“bandit auctions”).
Contracts, Information Persistence, and Renegotiation
, 2011
"... This paper studies how renegotiation and information persistence shape longterm contracts in principalagent relationships. Truthful contracts that are renegotiationproof, according to a concept tailored to account for persistence in the agent’s type, are characterized by their sensitivity to the ..."
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This paper studies how renegotiation and information persistence shape longterm contracts in principalagent relationships. Truthful contracts that are renegotiationproof, according to a concept tailored to account for persistence in the agent’s type, are characterized by their sensitivity to the reports of the agent. The sensitivity of the optimal renegotiationproof contract is increasing in information persistence and in the discount rate of the agent, and causes immiserization. Renegotiationproof contracts are selfcorrecting off the equilibrium path. These results still hold when the agent is also subject to moral hazard. In that case, a lower cost of effort of the agent can reduce the payoff of the principal by increasing the severity of the agency problem.