Publication Date: September 2009
We examine a repeated interaction between an agent, who undertakes experiments, and a principal who provides the requisite funding for these experiments. The agent’s actions are hidden, and the principal, who makes the oﬀers, cannot commit to future actions. We identify the unique Markovian equilibrium (whose structure depends on the parameters) and characterize the set of all equilibrium payoﬀs, uncovering a collection of non-Markovian equilibria that can Pareto dominate and reverse the qualitative properties of the Markovian equilibrium. The prospect of lucrative continuation payoﬀs makes it more expensive for the principal to incentivize the agent, giving rise to a dynamic agency cost. As a result, constrained eﬀicient equilibrium outcomes call for nonstationary outcomes that front-load the agent’s eﬀort and that either attenuate or terminate the relationship ineﬀiciently early.
Experimentation, Learning, Agency, Dynamic agency, Venture Capital, Repeated principal-agent problem
JEL Classification Codes: D8, L2