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Improving the Effort Concept: A Revision of the Traditional Approach in the Context of Controlled Dynamic Stochastic Environments

AuthorsProtopopescu, Dan
KeywordsOptimal trajectory
Closed-loop strategy
Controlled stochastic environment
Rational decision-maker
Endogenous dynamic active learning
Adaptive effort management
Optimal effort threshold
Effort aversion
Excessive behavior
Learning of preferences
Issue Date1-Apr-2008
SeriesUFAE and IAE Working Papers
AbstractThe objective of this paper is to re-evaluate the attitude to effort of a risk-averse decision-maker in an evolving environment. In the classic analysis, the space of efforts is generally discretized. More realistic, this new approach emploies a continuum of effort levels. The presence of multiple possible efforts and performance levels provides a better basis for explaining real economic phenomena. The traditional approach (see, Laffont, J. J. & Tirole, J., 1993, Salanie, B., 1997, Laffont, J.J. and Martimort, D, 2002, among others) does not take into account the potential effect of the system dynamics on the agent's behavior to effort over time. In the context of a Principal-agent relationship, not only the incentives of the Principal can determine the private agent to allocate a good effort, but also the evolution of the dynamic system. The incentives can be ineffective when the environment does not incite the agent to invest a good effort. This explain why, some efficient strategic incentive-compatible constraints that cover the entire period of contract do not generally exist. The present approach improves our understanding as regards the agent's psychology to effort as decision-maker. It provides new perspectives of research for theorists and empirical analysts.
DescriptionSubmitted for publication to the Journal of Economic Theory.
Appears in Collections:(IAE) Informes y documentos de trabajo

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