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Informed principal with correlation

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  • Michela CELLA

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Abstract

In this paper we analyze a simple two-sided adverse selection model with one principaland 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 ofthe agent. The main result of the paper is that the principal can extract a larger share ofthe surplus from the agent than in the case where her information is public. The principalcan design such a contract because she exploits the fact that her type is an informativesignal on the agent’s one. We fully characterize the equilibrium of the principal agent gamein which different types of principal offer the same menu of contracts that leave the agentuninformed about the principal’s type. This gives more freedom to the principal whensetting 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 agenthave different beliefs about the probability distribution over the states of the world.

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Bibliographic Info

Paper provided by Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano in its series Departmental Working Papers with number 2007-11.

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Date of creation: 31 Mar 2007
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Handle: RePEc:mil:wpdepa:2007-11

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Keywords: Informed principal; private values; correlation;

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References

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  1. Riordan, Michael H. & Sappington, David E. M., 1988. "Optimal contracts with public ex post information," Journal of Economic Theory, Elsevier, vol. 45(1), pages 189-199, June.
  2. McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
  3. Roger B. Myerson, 1981. "Mechanism Design by an Informed Principal," Discussion Papers 481, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  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.
  5. Strausz, Roland, 2006. "Deterministic versus stochastic mechanisms in principal-agent models," Journal of Economic Theory, Elsevier, vol. 128(1), pages 306-314, May.
  6. Eric Maskin & Kevin Roberts, 2008. "On the fundamental theorems of general equilibrium," Economic Theory, Springer, vol. 35(2), pages 233-240, May.
  7. 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.
  8. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
  9. 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.
  10. 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.
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Cited by:
  1. Mylovanov, Tymofiy & Tröger, Thomas, 2013. "Mechanism Design by an Informed Principal: The Quasi-Linear Private-Values Case," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 437, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  2. Mylovanov, Timofiy & Tröger, Thomas, 2012. "Informed principal problems in generalized private values environments," Theoretical Economics, Econometric Society, vol. 7(3), September.
  3. Michela Cella, 2005. "Risky Allocations from a Risk-Neutral Informed Principal," Economics Series Working Papers 234, University of Oxford, Department of Economics.
  4. Thomas Tröger & Tymofiy Mylovanov, 2008. "Optimal Auction Design and Irrelevance of Private Information," Bonn Econ Discussion Papers bgse21_2008, University of Bonn, Germany.
  5. Vasiliki Skreta, 2007. "On the Informed Seller Problem: Optimal Information Disclosure," Levine's Bibliography 122247000000001789, UCLA Department of Economics.
  6. repec:hal:cesptp:hal-00607075 is not listed on IDEAS
  7. Feess,Eberhard & Schieble,Michael & Markus,Walzl, 2004. "When should principals acquire verifiable information?," Research Memorandum 049, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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