Roy Seminar (ADRES)

Du 27/05/2019 de 17:00 à 18:30

Salle R1-09, Campus Jourdan, 48 boulevard Jourdan, 75014 Paris

EKMEKCI Mehmet (Boston College)

Reputation and Screening in a Noisy Environment with Irreversible Actions

We introduce a class of two-player dynamic games to study the effectiveness of screening in a principal-agent problem. In every period, the principal chooses either to irreversibly stop the game, or to continue. In every period until the game is stopped, the agent chooses an action that affects the flow payoffs to the players. The agent’s type is his private information, and his actions are imperfectly observed. Players receive a lump-sum payoff when the game stops, and the principal’s payoff depends on the agent’s type. Both players are long-lived and share a common discount factor. We study the limit of the equilibrium outcomes as both players get arbitrarily patient. We show that Nash equilibrium outcomes of the dynamic game converge to the unique Nash equilibrium outcome of an auxiliary two-stage game with observed mixed actions. Hence, dynamic screening eliminates noise in monitoring, but beyond that, it is ineffective. We calculate the probability that the principal eventually stops the game, against each type of the agent. The principal learns some but not all information about the agent’s type. All payoff relevant information is revealed at the beginning of the game. Applications include procurement, promotions and demotions within organizations and venture-capital financing.