Motivating Effort with Information about Future Rewards

This paper studies the optimal mechanism to motivate effort in a dynamic principal-agent model without transfers. An agent is engaged in a task with uncertain future rewards and can choose to shirk at any time. The principal knows the reward of the task and provides information to the agent over time. The optimal information policy can be characterized in closed form, revealing two key conditions that make dynamic disclosure valuable: one is that the principal is impatient compared with the agent; the other is that the environment makes the agent become pessimistic over time without any information disclosure. In a stationary environment, the principal benefits from dynamic disclosure if and only if she is less patient than the agent. Maximum delayed disclosure is optimal for an impatient principal: the principal delays all disclosures up to the maximum time threshold and then fully discloses. By contrast, in a pessimistic environment, the principal always benefits from dynamic disclosure, but the level of patience is still a crucial determinant of the structure of the optimal policy