Delegating Trial and Error
26 Pages Posted: 29 Apr 2022 Last revised: 29 Jan 2024
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: Suggested Citation