Progressive learning
Files
Accepted manuscript
Date
2017-12-04
Authors
Acharya, Avidit
Ortner, Juan
Version
OA Version
Citation
A Acharya, J Ortner. November 2017. "Progressive Learning." Econometrica, Volume 85, Issue 6, pp. 1965-1990. https://doi.org/10.3982/ECTA14718
Abstract
We study a dynamic principal–agent relationship with adverse selection and limited commitment. We show that when the relationship is subject to productivity shocks, the principal may be able to improve her value over time by progressively learning the agent's private information. She may even achieve her first‐best payoff in the long run. The relationship may also exhibit path dependence, with early shocks determining the principal's long‐run value. These findings contrast sharply with the results of the ratchet effect literature, in which the principal persistently obtains low payoffs, giving up substantial informational rents to the agent.