Optimal Dynamic Contract of Influence
Date: 2019-09-10


Yi Chen is an Assistant Professor of Economics at Cornell University. He received his PhD of Economics at Yale University, with a focus on information economics. His research includes both theoretical and applied approaches to principal-agent problems, dynamic games, and information design.


I study the optimal dynamic contract in a long-term principal-agent relationship, where the agent privately observes an evolving state but his preferences are state-independent. The principal commits to action flows based solely on the agent’s reports. I show that communication is generically effective despite the misaligned preferences. Moreover, the optimal contract can stipulate actions that move in the opposite direction of the principal’s ideal actions; a necessary and sufficient condition is provided. The principal is worse off over time in expectation, but the agent is not necessarily immiserated. The results apply to dynamic allocation problems such as capital budgeting.