Abstract

http://ssrn.com/abstract=311547
 
 

References (28)



 
 

Citations (20)



 


 



Dynamic Mechanism Design with Hidden Income and Hidden Actions


Matthias Doepke


Northwestern University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)

Robert M. Townsend


MIT - Department of Economics

April 2002

UCLA Department of Economics Working Paper No. 818

Abstract:     
We develop general recursive methods to solve for optimal contracts in dynamic principal-agent environments with hidden states and hidden actions. In our baseline model, the principal observes nothing other than transfers. Nevertheless, optimal incentive-constrained insurance can be attained. Starting from a general mechanism with arbitrary communication, randomization, full history dependence, and without restrictions on preferences or technology, we show how the optimal contract can be efficiently implemented as a recursive direct mechanism. Our methods generalize to environments with multiple actions and additional states, some of which may be observable. The key to implementing these extensions is to introduce multiple layers of off-path utility bounds.

Number of Pages in PDF File: 63

Keywords: Moral Hazard, Public Reserves, Mechanism Design, Dynamic Contracts

JEL Classification: C63, C73, D82

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Date posted: May 29, 2002  

Suggested Citation

Doepke, Matthias and Townsend, Robert M., Dynamic Mechanism Design with Hidden Income and Hidden Actions (April 2002). UCLA Department of Economics Working Paper No. 818. Available at SSRN: http://ssrn.com/abstract=311547 or http://dx.doi.org/10.2139/ssrn.311547

Contact Information

Matthias Doepke (Contact Author)
Northwestern University - Department of Economics ( email )
2003 Sheridan Road
Evanston, IL 60208
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
Robert M. Townsend
MIT - Department of Economics ( email )
Bldg. E52-252c
50 Memorial Drive
Cambridge, MA 02142
United States
617-452-3722 (Phone)
617-253-1330 (Fax)
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