Monopolistic screening under learning by doing

This article investigates the design of incentives in a dynamic adverse selection framework where agents' production technologies display learning effects and agents' learning rates are private knowledge. In a simple two-period model with full commitment available to the principal, we show...

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Bibliographic Details
Published in:The Rand journal of economics 2010-09, Vol.41 (3), p.574-597
Main Author: Gärtner, Dennis L.
Format: Article
Language:English
Subjects:
Adverse selection
Agency
Cost analysis
Cost efficiency
Cost incentives
Cost reduction
Economic regulation
Experiential learning
Exploitation
Industrial regulation
Innovations
Intuition
Learning
Learning by doing
Learning rate
Marginal costs
Monopolies
Overharvesting
Production costs
Production systems
Studies
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Summary:This article investigates the design of incentives in a dynamic adverse selection framework where agents' production technologies display learning effects and agents' learning rates are private knowledge. In a simple two-period model with full commitment available to the principal, we show that whether learning effects are over- or underexploited crucially depends on whether more efficient agents also learn faster (so costs diverge through learning effects) or whether it is the less efficient agents who learn faster (so costs converge). We further show that an overexploitation of learning effects can occur also if the full-commitment assumption is relaxed.
ISSN:0741-6261
1756-2171
DOI:10.1111/j.1756-2171.2010.00112.x