Information and Experimentation in Short-Term Contracting
Thomas D. Jeitschko
Michigan State University - Department of Economics
Leonard J. Mirman
University of Virginia - Department of Economics
In this paper the impact of noise on dynamic adverse selection in principal-agent relationships is examined. Significant deviations in terms of equilibrium actions and payments occur, when compared to deterministic environments. Information dissipates slowly, so payments to agents who stand to loose informational rents over time are lower than compared to deterministic settings. Moreover, the principal manipulates the agent's actions to affect the informativeness of the signal. Thus, the principal trades-off lower initial payments with higher informational rents later. At the same time, the principal manipulates the signal distribution to enhance the principal's ability to learn about the agent's type.
Number of Pages in PDF File: 24
JEL Classification: D8, C73
Date posted: March 8, 1999
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