The project aims at contributing to the theoretical understanding of dynamic mechanism design and dynamic contracting. Contract theory studies how agreements are reached to determine, for instance, the allocations of goods, payments, and incentives for effort. Much of the literature studies static models. However, many real-world interactions are dynamic in the sense that they take place over time or involve repeated interactions. Dynamics introduces an additional dimension that opens a rich array of questions. Dynamics also introduce an additional layer of complexity that can make the models less analytically tractable, presenting a challenge to the researcher.
The study of dynamic contracting can underpin a deeper understanding of agreements in a broad range of contexts. It potentially feeds through directly to policy. Examples might include lessons about how to better structure government procurement and natural monopoly regulation. Understanding of firm behaviour and pricing decisions could flow through to better informed competition policy. Some of the work could also potentially be picked up by empirical researchers (e.g. so-called "structural" work that brings theoretical models directly to data).
Four principal areas have been considered. (1) Tractable models of dynamic competition in contracts were studied where agents search over time. In these works, as elsewhere in the literature, dispersion of prices or other contractual variables are the result of search frictions and competition. A dynamic model has also been developed that suggests empirically relevant patterns of price dispersion (“sales”) can arise even when competition is absent. (2) Approaches have been developed to study dynamic contracts when an agent or agents' private information evolves randomly over time. One central approach has emphasized that a complete characterisation of the agreement may not be needed to obtain at least some relevant insights about dynamics (e.g. long-run efficiency of the optimal agreements). (3) A result was established showing the difficulty of obtaining efficient bilateral trade when traders' information evolves randomly and when traders arrive to the market over time. (4) Different dynamic models of contracting have been studied where agents make investments, with scope to apply the findings to a range of contexts.
