Mitigating Information Asymmetry in Two-Stage Contracts with Non-Myopic Agents

TL;DR

This paper analyzes how a principal can design two-stage contracts to ensure truthful reporting from non-myopic agents with unknown types, highlighting the limitations of incentive functions and proposing an adjustment mechanism for better flexibility.

Contribution

It characterizes the conditions under which truthful incentives can be designed in two-stage contracts with non-myopic agents, introducing an adjustment mechanism for improved flexibility.

Findings

Constant, non-reactive incentives only work with continuous types.

Reactive incentives can handle discrete types.

Adjustment mechanisms enable more flexible incentive design.

Abstract

We consider a Stackelberg game in which a principal (she) establishes a two-stage contract with a non-myopic agent (he) whose type is unknown. The contract takes the form of an incentive function mapping the agent's first-stage action to his second-stage incentive. While the first-stage action reveals the agent's type under truthful play, a non-myopic agent could benefit from portraying a false type in the first stage to obtain a larger incentive in the second stage. The challenge is thus for the principal to design the incentive function so as to induce truthful play. We show that this is only possible with a constant, non-reactive incentive functions when the type space is continuous, whereas it can be achieved with reactive functions for discrete types. Additionally, we show that introducing an adjustment mechanism that penalizes inconsistent behavior across both stages allows the principal to design more flexible incentive functions.