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A Principal-Agent Model of Sequential Testing

By Dino Gerardi Y and Lucas Maestri Z

Abstract

This paper analyzes the optimal provision of incentives in a dynamic information acquisition process. In every period, the agent can acquire costly information that is relevant to the principal’s decision. Each signal may or may not provide de…nitive evidence in favor of the good state. Neither the agent’s e¤ort nor the realizations of his signals are observable. First, we assume that the agent has no private information at the time of contracting. Under the optimal mechanism, the agent is rewarded only when his messages are consistent with the state. The payments that the agent receives when he correctly announces the good state increase over time. We then characterize the optimal mechanisms when the agent has superior information about the state 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

Topics: Dynamic Mechanism Design, Information Acquisition, Sequential Testing
Year: 2011
OAI identifier: oai:CiteSeerX.psu:10.1.1.352.4140
Provided by: CiteSeerX
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