Abstract

I explore how a principal dynamically chooses among multiple agents to utilize for production. The principal chooses at most one agent to utilize in every period affecting the states of the agents. A utilized agent changes its state because it is utilized, but the nonutilized agents do not remain at rest: they also change their state. The analysis requires a novel methodological approach: the agency problem that the principal faces with each agent is shown to be an appropriately designed restless bandit, creating a multiarmed restless bandit. The optimal contract is characterized by an index rule for the restless bandit.