Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/253441 
Year of Publication: 
2020
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 15 [Issue:] 2 [Publisher:] The Econometric Society [Place:] New Haven, CT [Year:] 2020 [Pages:] 583-623
Publisher: 
The Econometric Society, New Haven, CT
Abstract: 
We study dynamic contracting with adverse selection and limited commitment. A firm (the principal) and a worker (the agent) interact for potentially infinitely many periods. The worker is privately informed about his productivity and the firm can only commit to short-term contracts. The ratchet effect is in place since the firm has the incentive to change the terms of trade and offer more demanding contracts when it learns that the worker is highly productive. As the parties become arbitrarily patient, the equilibrium outcome takes one of two forms. If the prior probability of the worker being productive is low, the firm offers a pooling contract and no information is ever revealed. In contrast, if this prior probability is high, the firm fires the unproductive worker at the very beginning of the relationship.
Subjects: 
Dynamic contracting
limited commitment
ratchet effect
JEL: 
D80
D82
D86
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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