Topics in Dynamic Mechanism Design

This thesis develops and applies techniques in dynamic mechanism design. These techniques are used to study two quite different problems. In Chapter 1, I study the problem of a durable-goods monopolist facing buyers who arrive to the market over time and whose valuations for the good evolve stochastically but exhibit persistence. I first suppose that the seller commits to a path of posted prices in a stationary environment. Contrary to the case where values remain constant, optimal prices fluctuate over time. A path of posted prices, however, is not the most profitable mechanism. With no restriction on the format, the optimal mechanism can be implemented by selling options to purchase the good in the future. As is the case for optimal posted prices, buyers who arrive later expect to earn less rent and expect to wait longer to obtain the good.;Chapters 2 and 3 consider dynamic managerial compensation. These chapters characterize the optimal mechanism for a firm hiring a manager, or a sequence of managers, to run the business. A manager faces a decision to privately exert costly effort to improve profit. His ability to generate profits for the firm (his productivity) changes stochastically over time. When the manager is risk neutral, the optimal contract often entails a simple pay package that is linear in the firm's cash flows. Furthermore, the power of incentives (i.e., the sensitivity of pay to performance) typically increases over time, thus providing a possible justification for the practice of putting more stocks and options in the packages of managers with a longer tenure in the firm. Chapter 2 introduces the baseline model and derives these results. It then considers the case of a risk-averse manager and shows that the power of incentives then need not increase with time. Chapter 3 considers the possibility that the firm can replace an existing manager by returning to the labor market. The focus of this chapter is to characterize the firm's optimal turnover policy.