Incentives for Experimenting Agents

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 cannot commit to future actions. 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. As a result, the principal may deliberately delay experimental funding, reducing the continuation value of the project and hence the agent’s current incentive costs. We characterize the set of recursive Markov equilibria. We also find that there are non-Markov equilibria that make the principal better off than the recursive Markov equilibrium, and that may make both agents 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.Experimentation, Learning, Agency, Dynamic agency, Venture capital, Repeated principal-agent problem

Decomposable Principal-Agent Problems

This paper investigates conditions under which the adverse selection principal-agent problem can be decomposed into a collection of pointwise maximization problems. The analysis uses an extension of the type assignment approach to optimal nonuniform pricing, pioneered by Goldman, Leland and Sibley (1984), to derive simple sufficient conditions under which such a decomposition is possible. These conditions do not preclude optimal bunching that arises because virtual surplus functions violate the single-crossing property or participation constraints bind at interior types.

Incentives for Experimenting Agents

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.Experimentation, Learning, Agency, Dynamic agency, Venture capital, Repeated principal-agent problem

Managing Strategic Buyers

We consider the problem of a monopolist who must sell her inventory before some deadline, facing n buyers with independent private values. The monopolist posts prices but has no commitment power. The seller faces a basic trade-off between imperfect price discrimination and maintaining an effective reserve price. When there is only one unit and only a few buyers, the seller essentially posts unacceptable prices up to the very end, at which point prices collapse in a series of jumps to a "reserve price" that exceeds marginal cost. When there are many buyers, the seller abandons this reserve price in order to more effectively screen buyers. Her optimal policy then replicates a Dutch auction, with prices decreasing continuously over time.Revenue management, Intertemporal price discrimination, Coase conjecture, Perishable goods, Reserve price, Dutch auction