COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1726 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. |
