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Reputation and screening in a noisy environment with irreversible actions

Author

Listed:
  • Ekmekci, Mehmet
  • Maestri, Lucas
Abstract
We introduce a class of two-player dynamic games to study the effectiveness of screening in a principal-agent problem. In every period, the principal chooses either to irreversibly stop the game or to continue, and the agent chooses an action if the principal chooses to continue. The agent’s type is his private information, and his actions are imperfectly observed. Players’ flow payoffs depend on the agent’s action, and players’ lump-sum payoffs when the game stops depends on the agent’s type. Both players are long-lived and share a common discount factor. We study the limit of the equilibrium outcomes as both players get arbitrarily patient. Nash equilibrium payoff vectors converge to the unique Nash equilibrium payoff vector of an auxiliary, two-stage game with observed mixed actions. The principal learns some but not all information about the agent’s type. Any payoff-relevant information revelation takes place at the beginning of the game. We calculate the probability that the principal eventually stops the game, against each type of the agent.

Suggested Citation

  • Ekmekci, Mehmet & Maestri, Lucas, 2019. "Reputation and screening in a noisy environment with irreversible actions," MPRA Paper 100885, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:100885
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    File URL: https://mpra.ub.uni-muenchen.de/100885/1/MPRA_paper_100885.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Pei, Harry, 2022. "Reputation for playing mixed actions: A characterization theorem," Journal of Economic Theory, Elsevier, vol. 201(C).
    2. Ekmekci, Mehmet & Maestri, Lucas, 2022. "Wait or act now? Learning dynamics in stopping games," Journal of Economic Theory, Elsevier, vol. 205(C).
    3. Harry Pei, 2020. "Reputation for Playing Mixed Actions: A Characterization Theorem," Papers 2006.16206, arXiv.org, revised Apr 2021.
    4. Li, Yingkai & Pei, Harry, 2021. "Equilibrium behaviors in repeated games," Journal of Economic Theory, Elsevier, vol. 193(C).

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    More about this item

    Keywords

    Dynamic Games; Screening; Reputation; Imperfect Monitoring;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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