American Economic Journal: Microeconomics
no. 1, February 2023
This paper studies a canonical dynamic screening problem where the agent has Markovian private information and limited commitment and the principal and the agent have different discount factors. Unequal discounting captures unequal access to capital markets. In comparison to standard models of dynamic mechanism design, the principal no longer finds it optimal to maximally back-load the agent's information rents: a new force of intertemporal cost of incentive provision pushes toward front-loading agents' payoffs. The optimal contract settles into a cycle with infinite memory. The introduction of unequal discounting renders the standard relaxed-problem approach invalid for certain parameters. A simple and approximately optimal contract is then provided.
Krasikov, Ilia, Rohit Lamba, and Thomas Mettral.
"Implications of Unequal Discounting in Dynamic Contracting."
American Economic Journal: Microeconomics,
Firm Behavior: Theory
Allocative Efficiency; Cost-Benefit Analysis
Asymmetric and Private Information; Mechanism Design
Economics of Contract: Theory
Transactional Relationships; Contracts and Reputation; Networks