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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Volume (Year): 28 (1997) Issue (Month): 4 (Winter) Pages: 641-661 Download reference. The following formats are available: HTML
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Gerd Mühlheusser & Andreas Roider, 2005.
"Black Sheep and Walls of Silence,"
Discussion Papers
56, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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