A Principal-Agent Model of Sequential Testing

47 Pages Posted: 31 Oct 2008

See all articles by Dino Gerardi

Dino Gerardi

Yale University - Cowles Foundation

Lucas Maestri

University of Toulouse 1 - Toulouse School of Economics (TSE)

Date Written: October 27, 2008

Abstract

This paper analyzes the optimal provision of incentives in a sequential testing context. In every period the agent can acquire costly information that is relevant to the principal's decision. Neither the agent's effort nor the realizations of his signals are observable. First, we assume that the principal and the agent are symmetrically informed at the time of contracting. We construct the optimal mechanism and show that the agent is indifferent in every period between performing the test and sending an uninformative message which continues the relationship. Furthermore, in the first period the agent is indifferent between carrying out his task and sending an uninformative message which ends the relationship immediately. We then characterize the optimal mechanisms when the agent has superior information at the outset of the relationship. The principal prefers to offer different contracts if and only if the agent types are sufficiently diverse. Finally, all agent types benefit from their initial private information.

Keywords: Dynamic mechanism design, Information acquisition, Sequential testing

JEL Classification: C72, D82, D83

Suggested Citation

Gerardi, Dino and Maestri, Lucas, A Principal-Agent Model of Sequential Testing (October 27, 2008). Cowles Foundation Discussion Paper No. 1680, Available at SSRN: https://ssrn.com/abstract=1290568

Dino Gerardi (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3562 (Phone)
203-432-5779 (Fax)

Lucas Maestri

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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