Reputation and Screening in a Noisy Environment with Irreversible Actions

91 Pages Posted: 25 Jun 2020

See all articles by Mehmet Ekmekci

Mehmet Ekmekci

Boston College - Department of Economics

Lucas Maestri

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

Date Written: August 28, 2019

Abstract

We introduce a class of two-player dynamic games to study the effectiveness of screening in a principal-agent problem. In every period, the principal chooses either to irreversibly stop the game or to continue, and the agent chooses an action if the principal chooses to continue. The agent’s type is his private information, and his actions are imperfectly observed. Players’ flow payoffs depend on the agent’s action, and players’ lump-sum payoffs when the game stops depends on the agent’s type. Both players are long-lived and share a common discount factor. We study the limit of the equilibrium outcomes as both players get arbitrarily patient. Nash equilibrium payoff vectors converge to the unique Nash equilibrium payoff vector of an auxiliary, two-stage game with observed mixed actions. The principal learns some but not all information about the agent’s type. Any payoff-relevant information revelation takes place at the beginning of the game. We calculate the probability that the principal eventually stops the game, against each type of the agent.

Keywords: Dynamic Games, Screening, Reputation, Imperfect Monitoring

JEL Classification: C72, C73, D82, D86

Suggested Citation

Ekmekci, Mehmet and Maestri, Lucas, Reputation and Screening in a Noisy Environment with Irreversible Actions (August 28, 2019). Available at SSRN: https://ssrn.com/abstract=3617179 or http://dx.doi.org/10.2139/ssrn.3617179

Mehmet Ekmekci (Contact Author)

Boston College - Department of Economics ( email )

United States

Lucas Maestri

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

Place Anatole-France
Toulouse Cedex, F-31042
France

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