Intertemporal cost dependence in the presence of managerial impatience

A multi-period agency problem arising in the presence of intertemporal cost dependence is investigated. The principal delegates production decisions to a manager who is impatient. The manager has private information on the nature of cost dependence that takes the form of an experience effect. Since the impatient manager would not invest enough to gain experience, the principal designs a second-best scheme to motivate the manager to increase intertemporal profit for the firm. The second best scheme is obtained as a direct revelation mechanism that specifies outputs (prices) as well as the manager's compensation. A significant result is that unlike the first-best case, impatience is not necessarily a disadvantage with asymmetric information. Impatience can be exploited to reduce the manager's information rent resulting in preferred outcomes for the principal.