COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1726R Incentives for Experimenting Agents Johannes Hörner and Larry Samuelson September 2009 We examine a repeated interaction between an agent, who undertakes
experiments, and a principal who provides the requisite funding for these experiments. The
agent's actions are hidden, and the principal, who makes the offers, cannot commit to
future actions. We identify the unique Markovian equilibrium (whose structure depends on
the parameters) and characterize the set of all equilibrium payoffs, uncovering a
collection of non-Markovian equilibria that can Pareto dominate and reverse the
qualitative properties of the Markovian equilibrium. The prospect of lucrative
continuation payoffs makes it more expensive for the principal to incentivize the agent,
giving rise to a dynamic agency cost. As a result, constrained efficient equilibrium
outcomes call for nonstationary outcomes that front-load the agent's effort and that
either attenuate or terminate the relationship inefficiently early. |
