Optimal Contracting in Agency with Verifiable Ex Post Information
AbstractThe Paper studies a straightforward adverse selection problem in which an informative but imperfect signal on the agent’s type becomes public ex post. The agent is protected by limited liability, which rules out unboundedly high penalties. Analysing the consequences of the additional information and the corresponding extension of the space of feasible contracts, the following conclusions emerge. First, the qualitative effects of the signal can be unambiguously tied to the nature of the underlying problem (e.g., whether the agent is in a ‘buyer’ or a ‘seller’ position). Second, the joint surplus of the relationship may well fall, i.e., the distortions due to informational asymmetries can become more pronounced although more information is now available. Finally, the agent may benefit from releasing additional signals because of an associated increase in expected informational rents.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3428.
Date of creation: Jun 2002
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Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-02-18 (All new papers)
- NEP-IND-2003-02-20 (Industrial Organization)
- NEP-PUB-2003-02-18 (Public Finance)
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