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20.06. BGSE Micro Workshop: Marius Kulms

BGSE Micro Workshop with Marius Kulms (University of Bonn)

Event details
  • BGSE Workshop
When Jun 20, 2018
from 12:00 to 13:00
Where room 0.017
Contact Name Stephan Lauermann
Contact Email
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Optimal Contract Duration with Deteriorating Productivity


I study optimal dynamic contracting between a revenue maximizing principal and an agent where allocations determine the duration of the contract. In the spirit of sequential screening, the agent is privately informed about his ability to generate future returns and about those returns. The type evolution for the agent features a novel characteristic, namely random changes of state unobservable to both the principal and the agent. I solve for the revenue maximizing contract in a model with two types. The optimal contract duration features temporal distortions: the ex ante less productive type is fired early compared to the first-best contract. Most notably, the optimal contract with symmetric information is myopic whereas the optimal contractwith private information is generally not, that is it may exhibit a positive time value.
My paper has implications on real-world contracts in franchising and similar businesses as it rationalizes contract duration as screening device.

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