Technical Note—Dynamic Mechanism Design with Capacity Constraint.

When the number of tasks is large, how should a firm design reward and penalty schemes to incentivize its employees? In "Dynamic Mechanism Design with Capacity Constraint," He studies the role of capacity constraint in a project assignment problem, where a principal needs to assign multiple tasks to an agent. The author fully characterizes the optimal mechanism via a sequence of deadlines. This characterization is used to show that the presence of the capacity constraint reduces the principal's payoff and delays the completion of projects. It further illustrates that the widely adopted no-capacity constraint framework may provide inaccurate results in various dynamic problems. We study a project assignment problem, where a principal needs to assign multiple projects to an agent. The agent is privately informed about the cost, which could be high or low. The agent's type evolves stochastically over time. We fully characterize the optimal mechanism via a sequence of deadlines and show that the presence of the capacity constraint reduces the principal's payoff and delays the assignment of projects. In particular, as the number of projects increases, the limit optimal contract may be strictly bounded away from the optimal contract when there are infinitely many projects, and the principal's payoff may be strictly below that in the setting without the capacity constraint. Funding: This work was supported by the National Natural Science Foundation of China [Grant 72122023]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/opre.2023.2449. [ABSTRACT FROM AUTHOR]