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Informed Principal with Correlation

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Author Info
Michela Cella (University of Milan)

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Abstract

In this paper we analyze a simple two-sided adverse selection model with one principal and one agent. They are both risk neutral and have private information about their type. We also assume that the private information of the principal is correlated with the one of the agent. The main result of the paper is that the principal can extract a larger share of the surplus from the agent than in the case where her information is public. The principal can design such a contract because she exploits the fact that her type is an informative signal on the agent's one. We fully characterize the equilibrium of the principal agent game in which different types of principal offer the same menu of contracts that leave the agent uninformed about the principal's type. This gives more freedom to the principal when setting the transfers because the agent's constraints need to hold only at an interim stage. The principal gains from a peculiarity of the correlated environment: different types of agent have different beliefs about the probability distribution over the states of the world.

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Publisher Info
Paper provided by Universitá degli Studi di Milano in its series UNIMI - Research Papers in Economics, Business, and Statistics with number 1057.

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Date of creation: 03 Jun 2007
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Handle: RePEc:bep:unimip:1057

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Related research
Keywords: informed principal; private values; correlation;

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  1. McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March. [Downloadable!] (restricted)
  2. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-97, November. [Downloadable!] (restricted)
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  3. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November. [Downloadable!] (restricted)
  4. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January. [Downloadable!] (restricted)
  5. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March. [Downloadable!] (restricted)
  6. Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-61, March. [Downloadable!] (restricted)
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  1. Feess,Eberhard & Schieble,Michael & Markus,Walzl, 2004. "When should principals acquire verifiable information?," Research Memoranda 049, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  2. Michela Cella, 2005. "Risky Allocations from a Risk-Neutral Informed Principal," Economics Series Working Papers 234, University of Oxford, Department of Economics. [Downloadable!]
  3. Vasiliki Skreta, 2007. "On the Informed Seller Problem: Optimal Information Disclosure," Levine's Bibliography 843644000000000222, UCLA Department of Economics. [Downloadable!]
  4. Vasiliki Skreta, 2007. "On the Informed Seller Problem: Optimal Information Disclosure," Levine's Bibliography 122247000000001789, UCLA Department of Economics. [Downloadable!]
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