Year: 2006
Type: report
Abstract: We study the problem of a firm that faces asymmetric information about the productivity of its \npotential workers. In our framework, a worker’s productivity is either assigned by nature at birth, \nor determined by an unobservable initial action of the worker that has persistent effects over \ntime. We provide a characterization of the optimal dynamic compensation scheme that attracts \nonly high productivity workers: consumption –regardless of time period– is ranked according to \nlikelihood ratios of output histories, and the inverse of the marginal utility of consumption \nsatisfies the martingale property derived in Rogerson (1985). However, in the case of i.i.d. \noutput and square root utility we show that, contrary to the features of the optimal contract for a \nrepeated moral hazard problem, the level and the variance of consumption are negatively \ncorrelated, due to the influence of early luck into future compensation. Moreover, in this \nexample long-term inequality is lower under persistent private information
Authors: Сунил Гупта, Carl F. Mela, José M. Vidal-Sanz
Language: English
Topic: Game Theory and Applications
Field: Decision Sciences
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1578163871