Motivating Effort with Information about Future Rewards

Abstract: 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 shirk irreversibly at any time. The principal knows the reward of the task and provides information to the agent over time in order to motivate effort. We derive the optimal information policy in closed form and thus identify two conditions, each of which guarantees that delayed disclosure is valuable. First, if the principal is impatient compared to the agent, she prefers the front-loaded effort schedule induced by delayed disclosure. In a stationary environment, delayed disclosure is beneficial if and only if the principal is less patient than the agent. Second, if the environment makes the agent become pessimistic over time in absence of any information disclosure, then providing delayed news can counteract this downward trend in the agent's belief and encourage the agent to work longer. Notably, the level of patience remains a crucial determinant of the optimal policy structure.