Dynamic consistency in incentive planning with a material input

An incentive model of a planner and two firm-types is presented, in which the planner assigns material input to the Arms as part of the organization's production plan. The optimal incefitive-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 acid dysfunction in the Soviet planning system. (C) 2001 Elsevier Science B.V. All rights reserved. JEL classification: D71; D81.