Moral Hazard with Soft Information
AbstractWe study a model of moral hazard with soft information: the risk-averse agent takes an action and she alone observes the stochastic outcome; hence the principal faces a problem of ex post adverse selection. High-power contracts may not be appropriate when information is soft. The optimal truth-telling mechanism with audit requires a two-part tariff to be offered to the agent. The fixed component affords the agent a constant ex post information rent, which weakens the ex ante incentives for effort. We then establish an equivalence between a truthful mechanism and the general mechanism, for the agent’s payoff set and action choice. For the principal a truth-telling mechanism strictly dominates because it shields the agent from variations in the ex post payoffs. In that sense the optimal contract is unique.
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Bibliographic InfoPaper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2010-26.
Length: 27 pages
Date of creation: Nov 2010
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-26 (All new papers)
- NEP-BEC-2011-02-26 (Business Economics)
- NEP-CTA-2011-02-26 (Contract Theory & Applications)
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- Guillaume Roger, 2011.
"Optimal contract under moral hazard with soft information,"
2012-12, School of Economics, The University of New South Wales.
- Guillaume Roger, 2013. "Optimal Contract under Moral Hazard with Soft Information," American Economic Journal: Microeconomics, American Economic Association, vol. 5(4), pages 55-80, November.
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