Implications of Unequal Discounting in Dynamic Contracting

52 Pages Posted: 19 Mar 2018 Last revised: 26 May 2022

See all articles by Ilia Krasikov

Ilia Krasikov

Pennsylvania State University

Rohit Lamba

Pennsylvania State University - College of the Liberal Arts

Thomas Mettral

Humboldt University of Berlin

Date Written: May 25, 2022

Abstract

Dynamic contracts allow principal to relax future incentive constraints by backloading-- agent posts a bond which is liquidated over time. This is costless with equal access to capital, captured by equal discount rates. Here unequal discounting is introduced in a canonical screening problem, where agent has Markovian private information and limited commitment. The backloading force is tempered by an inter-temporal cost of incentive provision. The optimal contract features cycles with infinite memory. The interaction of Marokvian information and unequal discounting can render the standard relaxed approach invalid. An approximately optimal and simple alternative is provided, where both terms are formalized.

Keywords: Dynamic Mechanism Design, Financial Contracting, Unequal Discounting

JEL Classification: D82, D86

Suggested Citation

Krasikov, Ilia and Lamba, Rohit and Mettral, Thomas, Implications of Unequal Discounting in Dynamic Contracting (May 25, 2022). Available at SSRN: https://ssrn.com/abstract=3142932 or http://dx.doi.org/10.2139/ssrn.3142932

Ilia Krasikov

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

Rohit Lamba (Contact Author)

Pennsylvania State University - College of the Liberal Arts ( email )

University Park, PA 16802-3306
United States

HOME PAGE: http://www.rohitlamba.com

Thomas Mettral

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

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