MICRO/THEORY: Revision and Relation Dynamics; Dr Zhaoneng Yuan (Nanyang Technological University)

Abstract

This paper studies an infinitely repeated game between an agent and a principal, where the principal has the option to ask the agent to revise his work, and the revision is based on the principal’s subjective evaluation of the output. Revision can improve the output quality, but it also introduces incentive problems when the true motion of revision–whether out of efficiency or greed—is the principal’s private information. In optimal relational contract, the principal starts with excessive revision but ends with insufficient revision. As time progresses, both the revision declines and the relationship deteriorates. Moreover, the principal gradually cedes her revision option as the agent gains autonomy in his work.