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Test Contract

Anqi Li

Washington University in Saint Louis

August 1, 2014

I examine a dynamic agency model of imperfect public monitoring over finite T instances where signals can depend arbitrarily on past actions and exhibit moderate serial correlation. In this general environment, I propose a class of simple contracts, \emph{test contracts}, derive sharp equilibrium characterizations for each T and establish sufficient conditions for near-optimality when T is large. The construction makes only use of a uniform probability bound that is prescribed by concentration inequalities and a uniform payoff bound that holds naturally in many applications. The result depends on few details of the signal process and is robust even if these details are unknown to the contract designer. The analysis lends new insights into the agency theory.

Number of Pages in PDF File: 34

Keywords: dynamic contract; robust incentives

JEL Classification: D86

working papers series

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Date posted: July 6, 2013 ; Last revised: August 16, 2014

Suggested Citation

Li, Anqi, Test Contract (August 1, 2014). Available at SSRN: http://ssrn.com/abstract=2290373 or http://dx.doi.org/10.2139/ssrn.2290373

Contact Information

Anqi Li (Contact Author)
Washington University in Saint Louis ( email )
Department of Economics
One Brookings Drive
St. Louis, MO 63130
United States
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References:  26
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