Optimal dynamic contracting: The first-order approach and beyond

• 成果类型: Article
• 署名作者: Battaglini, Marco; Lamba, Rohit
• 署名单位: Cornell University; Pennsylvania Commonwealth System of Higher Education (PCSHE); Pennsylvania State University; Pennsylvania State University - University Park
• 刊物名称: THEORETICAL ECONOMICS
• ISSN/ISSBN: 1933-6837
• DOI: 10.3982/TE2355
• 发表日期: 2019-11-01
• 页码: 1435-1482
• 关键词: Contract theory; dynamic contracts

摘要

We explore the conditions under which the first-order approach (FO approach) can be used to characterize profit maximizing contracts in dynamic principal-agent models. The FO approach works when the resulting FO-optimal contract satisfies a particularly strong form of monotonicity in types, a condition that is satisfied in most of the solved examples studied in the literature. The main result of our paper is to show that except for nongeneric choices of the stochastic process governing the types' evolution, monotonicity and, more generally, incentive compatibility are necessarily violated by the FO-optimal contract if the frequency of interactions is sufficiently high (or, equivalently, if the discount factor, time horizon, and persistence in types are sufficiently large). This suggests that the applicability of the FO approach is problematic in environments in which expected continuation values are important relative to per period payoffs. We also present conditions under which a class of incentive compatible contracts that can be easily characterized is approximately optimal.