A principal-agent model of sequential testing

Dino Gerardi, Lucas Maestri
2012 Theoretical Economics  
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 e ort 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 indi erent in every period between performing the test and
more » ... ing an uninformative message which continues the relationship. Furthermore, in the rst period the agent is indi erent 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 o er di erent contracts if and only if the agent types are su ciently diverse. Finally, all agent types bene t from their initial private information.
doi:10.3982/te914 fatcat:vzsd7m5ou5c6jcjf4xs5vov3ne