Compromising Quality to Stay Relevant (joint with Matt Mitchell and Mallesh Pai).

Abstract:

We study a novel dynamic principal-agent framework which features adverse selection, moral hazard and no transfers. The model can be described as a bandit problem where the principal chooses between a safe and risky arm, whose type is known and whose output is controlled by a strategic agent. The principal prefers to pull the risky arm only if it is the high type whereas, irrespective of type, the agent wants to maximize the number of times it is pulled. Our main result shows that when the principal can commit, there are conditions under which the optimal dynamic mechanism induces efficient output from the risky arm. By contrast, in the absence of commitment, inefficient output must arise on path in all equilibria (subject to a mild refinement). We use our model to discuss reputation management by online content providers and by experts in organizations.