Delegating trial and error

A principal delegates a problem to an agent. The agent solves the problem by conducting independent trials. Each trial is privately costly and produces the solution with some probability. The principal relies on the agent to report the solution before realizing its benefits. The ability to conceal t...

Full description

Saved in:
Bibliographic Details
Published inJournal of economic theory Vol. 217; p. 105802
Main Authors Okat, Deniz, Nash, John G.F.
Format Journal Article
LanguageEnglish
Published Elsevier Inc 01.04.2024
Subjects
Commitment
Dynamic agency problems
Renegotiation
Trial and error
Trial and error
D86
Renegotiation
Commitment
O31
Dynamic agency problems
D82
Online AccessGet full text

Cover

More Information
Summary:A principal delegates a problem to an agent. The agent solves the problem by conducting independent trials. Each trial is privately costly and produces the solution with some probability. The principal relies on the agent to report the solution before realizing its benefits. The ability to conceal the solution enables the agent to extract rents from the principal. The optimal contract with commitment balances the agent's rents against the timeliness of the solution, and typically induces the agent to inefficiently idle. The optimal renegotiation-proof contract eliminates idleness, maximizes total surplus, yet cedes significant further rents to the agent. A principal that lacks commitment might optimally slow down problem solving by increasing the time taken to perform trials.
ISSN:0022-0531
1095-7235
DOI:10.1016/j.jet.2024.105802