Dynamic consistency in incentive planning with a material input

Abstract

An incentive model of a planner and two firm-types is presented, in which the planner assigns material input to the firms as part of the organization’s production plan. The optimal incentive-compatible one-period plan is described. This static plan is then shown to be not incentive-compatible in a dynamic (two-period) setting if the firm’s discount factor is not too low, and if it can hoard the material input between periods. The incentive-compatible dynamic problem is presented and analyzed. This incentive problem is related to hoarding and dysfunction in the Soviet planning system.