Implications of Unequal Discounting in Dynamic Contracting

Ilia Krasikov, Rohit Lamba, Thomas Mettral

Research output: Contribution to journalArticlepeer-review


This paper studies a canonical dynamic screening problem where the agent has Markovian private information and limited commitment and the principal and the agent have different discount factors. Unequal discounting captures unequal access to capital markets. In comparison to standard models of dynamic mechanism design, the principal no longer finds it optimal to maximally back-load the agent’s information rents: a new force of intertemporal cost of incentive provision pushes toward front-loading agents’ payoffs. The optimal contract settles into a cycle with infinite memory. The introduction of unequal discounting renders the standard relaxed-problem approach invalid for certain parameters. A simple and approximately optimal contract is then provided.

Original languageEnglish (US)
Pages (from-to)638-692
Number of pages55
JournalAmerican Economic Journal: Microeconomics
Issue number1
StatePublished - 2023

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)


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