Delegating Trial and Error

26 Pages Posted: 29 Apr 2022 Last revised: 29 Jan 2024

See all articles by Deniz Okat

Deniz Okat

Hong Kong University of Science & Technology (HKUST)

John G.F. Nash

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Date Written: January 15, 2024

Abstract

A principal delegates a problem to an agent. The agent solves the problem by conducting independent trials. Each trial is privately costly and produces the solution with some probability. The principal relies on the agent to report the solution before realizing its benefits. The ability to conceal the solution enables the agent to extract rents from the principal. The optimal contract with commitment balances the agent's rents against the timeliness of the solution, and typically induces the agent to inefficiently idle. The optimal renegotiation-proof contract eliminates idleness, maximizes total surplus, yet cedes significant further rents to the agent. A principal that lacks commitment might optimally slow down problem solving by increasing the time taken to perform trials.

Keywords: Trial and error, dynamic agency problems, commitment, renegotiation

JEL Classification: D82, D86, O31

Suggested Citation

Okat, Deniz and Nash, John G.F., Delegating Trial and Error (January 15, 2024). HKUST Business School Research Paper No. 2022-063, Available at SSRN: https://ssrn.com/abstract=4090091 or http://dx.doi.org/10.2139/ssrn.4090091

Deniz Okat (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

John G.F. Nash

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

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