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A General Model of Coexisting Hidden Action and Hidden Information

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  • Suren Basov
  • Peter Bardsley

Abstract

We consider a general agency model with coexisting hidden action and hidden information. We prove that, with minor technical qualifications, independence of the production technology from the consumer type is necessary and sufficient for welfare irrelevance of hidden action. Our result clarifies and confirms the main conclusion drawn in the existing literature on mixed models, that if the parties are risk neutral and the production technology is not correlated with private information, then hidden action is irrelevant. However it makes it clear that even under risk neutrality this conclusion does not extend to the correlated case, which in practice occurs quite frequently. We illustrate it with a realistic example where neither hidden action nor hidden information on their own lead to welfare losses, while their combination does.

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Bibliographic Info

Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 958.

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Length: 42 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:mlb:wpaper:958

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Keywords: hidden action; hidden information; Fredholmintegral equations of the first type.;

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  1. Guesnerie Roger & Picard Pierre & Rey P, 1986. "Adverse selection and moral hazard with risk-neutral agent," CEPREMAP Working Papers (Couverture Orange) 8624, CEPREMAP.
  2. Melumad, Nahum D. & Reichelstein, Stefan, 1989. "Value of communication in agencies," Journal of Economic Theory, Elsevier, vol. 47(2), pages 334-368, April.
  3. Picard Pierre, 1986. "On the design of incentive schemes under moral hazard and adverse selection," CEPREMAP Working Papers (Couverture Orange) 8602, CEPREMAP.
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Cited by:
  1. Suren Basov, 2006. "Non-monotone Incentives in a Model of Coexisting Hidden Action and Hidden Information," Department of Economics - Working Papers Series 979, The University of Melbourne.
  2. Meng, Dawen & Tian, Guoqiang, 2013. "Multi-task incentive contract and performance measurement with multidimensional types," Games and Economic Behavior, Elsevier, vol. 77(1), pages 377-404.

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