# Why it Pays to Conceal - On the Optimal Timing of Acquiring Verifiable Information

## Author Info

• Feess, Eberhard
• Walzl, Markus

(METEOR)

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## Abstract

We consider optimal contracts when a principal has two sources to detect bad projects. The first one is an information technology without agency costs ($%IT_{P}$), whereas the second one is the expertise of an agent subject to moral hazard, adverse selection and limited liability ($IT_A$). First, we show that the principal does not necessarily benefit from access to additional information and thereby may prefer to ignore it. Second, we discuss different timings of information release, i.e. a \emph{disclosure} contract offered to the agent after the principal announced the result of $% IT_{P}$, and a \emph{concealment} contract where the agent exerts effort before $IT_{P}$ is checked. We find that oncealment is superior whenever the quality of $IT_{P}$ is sufficiently low. Then, $IT_{P}$ is almostworthless under a disclosure contract, while it can still be exploited to reduce the agent''s information rent under concealment. If the quality of $% IT_{P}$ improves, disclosure can be superior as it allows to adjust the agent''s effort to the up-dated expected quality of the project. However, even for a highly informative $IT_{P}$, concealment can be superior as itmitigates the adverse selection problem. Finally, we prove that the principal always benefits from checking $IT_P$ \textit{if} he chooses the optimal timing of information release. In particular, he may benefit only if he does not check $IT_P$ until the agent reported his findings.

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## Bibliographic Info

Paper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number 020.

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Handle: RePEc:dgr:umamet:2006020

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Web page: http://www.maastrichtuniversity.nl/web/UMPublications.htm

## Related research

Keywords: management information;

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## References

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1. Xu, Yongsheng & Yoshihara, Naoki, 2004. "Nonconvex bargaining problems," Discussion Paper Series a454, Institute of Economic Research, Hitotsubashi University.
2. Marco Ottaviani, 2000. "The Value of Public Information in Monopoly," Econometric Society World Congress 2000 Contributed Papers 1479, Econometric Society.
3. Gromb, Denis & Martimort, David, 2007. "Collusion and the organization of delegated expertise," Journal of Economic Theory, Elsevier, vol. 137(1), pages 271-299, November.
4. Feess, Eberhard & Walzl, Markus, 2006. "Why it Pays to Conceal - On the Optimal Timing of Acquiring Verifiable Information," Research Memoranda 020, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
5. Maschler,Michael Owen,Guillermo & Peleg,Bezalel, 1987. "Paths leadings to the Nash set," Discussion Paper Serie A 135, University of Bonn, Germany.
6. Anke S. Kessler & Christoph Lülfesmann & Patrick W. Schmitz, 2005. "Endogenous Punishments In Agency With Verifiable Ex Post Information ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(4), pages 1207-1231, November.
7. 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.
8. Gromb, Denis & Martimort, David, 2007. "Collusion and the Organization of Delegated Expertise," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
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## Citations

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Cited by:
1. Bücker, Michael & van Kampen, Maarten & Krämer, Walter, 2013. "Reject inference in consumer credit scoring with nonignorable missing data," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 1040-1045.
2. Eberhard Feess & Michael Schieble & Markus Walzl, 2011. "Why it Pays to Conceal: On the Optimal Timing of Acquiring Verifiable Information," German Economic Review, Verein für Socialpolitik, vol. 12(1), pages 100-123, 02.

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