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Optimal contract under moral hazard with soft information

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  • Guillaume Roger

    ()
    (School of Economics, The University of New South Wales)

Abstract

I study a model of moral hazard with soft information: the agent alone observes the stochastic outcome of her action; hence the principal faces a problem of ex post adverse selection. With limited instruments the principal cannot solve these two problems independently; the ex post incentive for misreporting interacts with the ex ante incentives for effort. The optimal transfer is option-like, the contract leaves the agent with some ex ante rent and fails to elicit truthful revelation in all states. Audit and transfer co-vary positively, which likely is a forgotten component of many real-life contracts.

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File URL: http://research.economics.unsw.edu.au/RePEc/papers/2012-12.pdf
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Bibliographic Info

Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2012-12.

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Length: 34 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:swe:wpaper:2012-12

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Keywords: moral hazard; asymmetric information; soft information; contract; mechanism; audit.;

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  1. Jonathan C. Glover & Anil Arya & Shyam NMI Sunder, 1999. "Earnings Management and the Revelation Principle," Yale School of Management Working Papers ysm120, Yale School of Management.
  2. Gromb, Denis & Martimort, David, 2004. "The Organization of Delegated Expertise," IDEI Working Papers 284, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Guillaume Roger, 2010. "Moral Hazard with Soft Information," Discussion Papers 2010-26, School of Economics, The University of New South Wales.
  4. Aloisio Araújo & Humberto Moreira, 2000. "A general Lagrangian approach for non-concave moral hazard problems," Textos para discussão 425, Department of Economics PUC-Rio (Brazil).
  5. Steven D. Levitt & Christopher M. Snyder, 1997. "Is No. News Bad News? Information Transmission and the Role of "Early Warning" in the Principal-Agent Model," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 641-661, Winter.
  6. Daniel Krähmer & Roland Strausz, 2011. "Optimal Procurement Contracts with Pre-Project Planning," Review of Economic Studies, Oxford University Press, vol. 78(3), pages 1015-1041.
  7. John R. Conlon, 2009. "Two New Conditions Supporting the First-Order Approach to Multisignal Principal-Agent Problems," Econometrica, Econometric Society, vol. 77(1), pages 249-278, 01.
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