Optimal contract under moral hazard with soft information
AbstractI 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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Bibliographic InfoPaper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2012-12.
Length: 34 pages
Date of creation: Oct 2011
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moral hazard; asymmetric information; soft information; contract; mechanism; audit.;
Other versions of this item:
- 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.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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