COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1726RRR 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
repeated interaction gives rise to a dynamic agency cost — the more lucrative is the
agent’s stream of future rents following a failure, the more costly are current
incentives for the agent, giving the principal an incentive to reduce the continuation
value of the project. We characterize the set of recursive Markov equilibria. We show that
there are non-Markov equilibria that make the principal better off than the recursive
Markov equilibrium, and that may make both players better off. Efficient equilibria
front-load the agent’s effort, inducing as much experimentation as possible over an
initial period, until making a switch to the worst possible continuation equilibrium. The
initial phase concentrates the agent’s effort near the beginning of the project,
where it is most valuable, while the eventual switch to the worst continuation equilibrium
attenuates the dynamic agency cost. |
