A recursive dynamic agency model is developed for situations where the state of nature follows a Markov process. The repeated agency model is a special case. It is found that the optimal effort depends not only on current performance but also on past performances, and the disparity between...

Why are bonus/promotion schemes so widely used in reality? Are they effective in alleviating incentive problems? For the standard agency model, this paper proposes an alternative solution to the classical solution in Holmström (1979). The advantages of our solution are that (1) it is a simple...