Abstract: This paper considers a principal-agent model without commitment. In a simple setting where the agent is risk-averse, the principal's response to the agent's output and to the fluctuation of an exogenous environment causes the agent's effort level to change over time on the equilibrium path. The paper fills a gap in the literature by studying the long-run limit of the equilibrium path. The question is important in understanding whether performance differences among ex ante similar organizations vanish over time. The tool of ergodic theory of Markov processes is introduced and used to show that the agent's effort and other characteristics of the equilibrium converge to a limit distribution independent of history under some assumptions. However, the limit distribution is not concentrated on a single point in general, so the equilibrium path does not converge to a stationary state. An example that violates these assumptions is also discussed and illustrates how fluctuation in outputs may lead to permanent performance differences.
Abstract: Asset reallocation has been recognized as an important source of economic growth in developing countries. In many of these countries, high activities in reallocation are accomplished when the enforcement of employment contract is weak. This paper studies an asset market where an employee’s effort is needed to realize the value of each asset. When contract enforcement is weak, incentives have to be given by a “relational contract”, and inefficient asset owners become even less efficient since their abilities to provide incentives are constrained by the lower future surplus they can create with ex ante identical employees. As a result, more inefficient asset owners are willing to sell their assets in an environment with weaker contract enforcement, and a developing country with weaker contract enforcement may enjoy a faster temporary growth and a higher stationary GDP level due to more active asset reallocation.
Research in Progress
Optimal Screening Contract with Information Acquisition
Abstract: Traditional optimal screening contracts assume that the agent is born with an informational advantage. This paper studies an environment in which the agent makes an endogenous decision on acquiring private information prior to contracting. In order to provide proper incentive to acquire information, the principal may create “upward” distortion in allocation for efficient agents. This analysis sheds light on the over-investment problem in organizations where a division manager can acquire private information about the return on a project and has a claim on that return. Overinvestment motivates the agent to learn about the return of the project and help the organization make a better decision.