Dynamic Principal - Multiple Agent Problems

Sevin Yeltekin

I explore risk-sharing in an environment with moral hazard, where individuals can take private actions that affect their productivity and receive a common productivity shock. In the presence of a common shock, independent contracts between each agent and the principal ignores the information conveyed by the relative performance of the agents. I show that this information can be used effectively in a dynamic labor contract (relative contract) based on relative as well as absolute performance of individuals. I develop computational methods to characterize the solution to the static and dynamic relative contracts and compare the optimal contracts in this setting with optimal independent contracts. I also characterize the repeated relative contract, compute the equilibrium value set and examine issues of collusion.

Scheduled for Session 2.5 Dynamic Contracting