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Is No. News Bad News? Information Transmission and the Role of "Early Warning" in the Principal-Agent Model

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  • Steven D. Levitt
  • Christopher M. Snyder

Abstract

The standard principal-agent model neglects the potentially important role of information transmission from agent to principal. We study optimal incentive contracts when the agent has a private signal of the likelihood of the project's success. We show that the principal can costlessly extract this signal if and only if this does not lead her to intervene in the project in any way that will influence its outcome. Intervention undermines incentives by weakening the link between the agent's initial effort and the project's outcome. If possible, the principal commits not to cancel some projects with negative expected payoffs. To elicit early warning, contracts must reward agents for coming forward with bad news.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 28 (1997)
Issue (Month): 4 (Winter)
Pages: 641-661

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Handle: RePEc:rje:randje:v:28:y:1997:i:winter:p:641-661

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Cited by:
  1. Jean-Etienne de Bettignies & Jan Zabojnik, 2013. "Information Sharing and Incentives in Organizations," Working Papers 1321, Queen's University, Department of Economics.
  2. Inderst, Roman, 2009. "Innovation management in organizations," European Economic Review, Elsevier, vol. 53(8), pages 871-887, November.
  3. Mitusch, Kay, 2006. "Non-commitment in performance evaluation and the problem of information distortions," Journal of Economic Behavior & Organization, Elsevier, vol. 60(4), pages 507-525, August.
  4. Guillaume Roger, 2013. "Moral Hazard with Discrete Soft Information," The Economic Record, The Economic Society of Australia, vol. 89(287), pages 545-555, December.
  5. Inderst, Roman, 2012. "Job Protection vs. Contracts At-Will: Trading-off Entrenchment and Shirking," MPRA Paper 53851, University Library of Munich, Germany.
  6. Giovanni Immordino & Marco Pagano, 2008. "Corporate Fraud, Governance and Auditing," CSEF Working Papers 203, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 26 Apr 2012.
  7. Jordi Blanes i Vidal & Marc Möller, 2013. "Decision-making and implementation in teams," LSE Research Online Documents on Economics 51544, London School of Economics and Political Science, LSE Library.
  8. Eisfeldt, Andrea L. & Rampini, Adriano A., 2008. "Managerial incentives, capital reallocation, and the business cycle," Journal of Financial Economics, Elsevier, vol. 87(1), pages 177-199, January.
  9. Baliga, Sandeep & Sjostrom, Tomas, 2001. "Optimal Design of Peer Review and Self-Assessment Schemes," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 27-51, Spring.
  10. Guillaume Roger, 2013. "Optimal Contract under Moral Hazard with Soft Information," American Economic Journal: Microeconomics, American Economic Association, vol. 5(4), pages 55-80, November.
  11. Inderst, Roman & Pfeil, Sebastian, 2010. "Securitization and Compensation in Financial Institutions," CEPR Discussion Papers 8089, C.E.P.R. Discussion Papers.
  12. Yucel, Eray, 2011. "A Review and Bibliography of Early Warning Models," MPRA Paper 32893, University Library of Munich, Germany.
  13. Florian Heider & Roman Inderst, 2012. "Loan Prospecting," Review of Financial Studies, Society for Financial Studies, vol. 25(8), pages 2381-2415.
  14. Langinier, Corinne & Marcoul, Phillipe, 2009. "Search of Prior Art and Revelation of Information by Patent Applicants," Working Papers 2009-21, University of Alberta, Department of Economics.
  15. Tamada, Yasunari & Tsai, Tsung-Sheng, 2014. "Delegating the decision-making authority to terminate a sequential project," Journal of Economic Behavior & Organization, Elsevier, vol. 99(C), pages 178-194.
  16. Anil Arya & John Fellingham & Hans Frimor & Brian Mittendorf, 2006. "On the Role of Receivables in Managing Salesforce Incentives," European Accounting Review, Taylor & Francis Journals, vol. 15(3), pages 311-324.

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