Working Paper: CEPR ID: DP17312
Authors: Venkataraman Bhaskar; Wojciech Olszewski; Thomas Wiseman
Abstract: We study a repeated principal-agent model with transferable utility, wherethe principal's evaluation of the agent's performance is subjective.Consequently, monitoring is noisy and private. We focus on equilibria thatare robust to small payoff shocks. Existing constructions to support effortfail to be equilibria in the presence of payoff shocks -- there is noequilibrium where the agent always exerts effort on the equilibrium path.Allowing the principal and agent to make simultaneous cheap-talkannouncements at the end of each period makes some effort sustainable in apurifiable equilibrium. Payoffs arbitrarily close to fully efficient ones can beachieved in equilibrium if players are sufficiently patient. In contrast toearlier constructions, bonus targets are non-trivial and employeeself-evaluation is critical.
Keywords: Private Monitoring; Repeated Games; Relational Contracts
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Principal's payoff shocks (G19) | Agent's effort exertion is not sustainable (J29) |
| Agent's deterministic effort choice (C78) | Agent will always shirk (D82) |
| Principal's preferences influenced by payoff shocks (D81) | Principal conditions bonus payments on shocks (J33) |
| Cheaptalk announcements (E60) | Purifiable equilibrium (D50) |
| Simultaneous announcements regarding performance and effort (D29) | Maintained incentives for the agent to work (J33) |
| Patience (Y60) | Sustainability of effort under relational contracts (L14) |