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Contracts with Endogenous Information

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  • Dezsö SZALAY

Abstract

I derive a general formulation of a Bayes Nash revelation game in a linear environment with endogenous information, whose precision depends on a covert choice of effort. I show that in nonstochastic mechanisms the first order approach to reporting (the Mirrless approach) can be complemented by a first order approach to effort spent on information acquisition if and only if i) the agent's posterior is independent of the agent's effort, ii) an increase in the agent's effort increases the risk (in the sense of Rothschild and Stiglitz (1970) in the ex ante distribution of the posterior mean, and iii) does so at a decreasing rate. Experiment structures with these characteristics arise when posteriors resulting from high (low) signals are higher (lower) for more informative signals (i.e., in monotone environments). The marginal value of information is ambiguous. Sufficient conditions for a negative or positive marginal value are derived. Contracts that encourage (discourage) information acquisition are more (less) sensitive to the agent's information than their counterparts for exogenous information structures. Distortions at the top arise if the agent may choose the precision of information directly.

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Bibliographic Info

Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 04.05.

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Length: 34 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:lau:crdeep:04.05

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
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Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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Related research

Keywords: asymmetric information; mechanism design; information acquisition; stochastic ordering; value of information; first order approach;

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References

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Citations

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Cited by:
  1. Johan N.M. Lagerlöf & Christoph Schotmüller, 2013. "Monopoly Insurance with Endogenous Information," Discussion Papers 13-15, University of Copenhagen. Department of Economics.
  2. Fleckinger, Pierre, 2012. "Correlation and relative performance evaluation," Journal of Economic Theory, Elsevier, vol. 147(1), pages 93-117.
  3. Shi, Xianwen, 2012. "Optimal auctions with information acquisition," Games and Economic Behavior, Elsevier, vol. 74(2), pages 666-686.
  4. Terstiege, Stefan, 2012. "Endogenous information and stochastic contracts," Games and Economic Behavior, Elsevier, vol. 76(2), pages 535-547.
  5. James Malcomson, 2004. "Principal and Expert Agent," Economics Series Working Papers 193, University of Oxford, Department of Economics.
  6. Terstiege, Stefan, 2013. "Precontractual Investigation and Sequential Screening," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 429, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  7. Krähmer, Daniel & Strausz, Roland, 2010. "Optimal Procurement Contracts with Pre–Project Planning," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 303, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  8. Lagerlöf, Johan N. M. & Schottmüller, Christoph, 2013. "Facilitating Consumer Learning in Insurance Markets—What Are the Welfare Effects?," CEPR Discussion Papers 9753, C.E.P.R. Discussion Papers.
  9. Stefan Terstiege, 2011. "Randomization in contracts with endogenous information," Bonn Econ Discussion Papers bgse07_2011, University of Bonn, Germany.
  10. Szalay, Dezsö, 2012. "Strategic information transmission and stochastic orders," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 386, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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