Turning the Ratchet: Dynamic Screening with Multiple Agents

TL;DR

This paper analyzes a dynamic contracting framework with multiple agents where the principal uses one-period contracts to screen agents, balancing incentives and information revelation over time, especially considering the effects of contract revisions and observability.

Contribution

It provides necessary and sufficient conditions for fostering information revelation in multi-agent dynamic contracts with limited commitment and observable contract alterations.

Findings

Private information is either never revealed or fully revealed sequentially.

Optimal contracts incentivize early disclosure of agent types.

Rewards for information revelation diminish over time.

Abstract

We study a dynamic contracting problem with multiple agents and limited commitment. A principal seeks to screen efficient agents using one-period contracts, but is tempted to revise contract terms upon knowing an agent's type. Alterations of contracts are observable and, hence, whenever past promises are broken future information revelation stops. We provide necessary and sufficient conditions under which information revelation can be fostered. For sufficiently patient players, private information is either never revealed or fully revealed in a sequential manner. Optimal contracts provide high-powered incentives upon initial disclosure of an agent's type, and rewards for information revelation vanish over time.