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Decentral Information Acquisition and the Value of Cost Observability

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Author Info
Ulf Schiller (University of Kvln, Germany)
Abstract

This paper investigates a situation where a manager gathers private information about the cost variables of his responsibility center. The owner then elicits the manager's information from a budgeting mechanism. If the manager has to acquire information before the budgeting stage, stronger production distortions relative to the standard adverse- selection situation arise. Moreover, the manager may engage in inefficient rent seeking and overinvests in the acquisition of information. Monitoring the manager's cost of gathering information limits the production distortion. However, this comes at very high rent- seeking activity. Conversely, if the owner commits not to monitor rent seeking is mitigated but at the cost of stronger production distortions.

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Publisher Info
Paper provided by EconWPA in its series Game Theory and Information with number 9710003.

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Length: 40 pages
Date of creation: 31 Oct 1997
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Handle: RePEc:wpa:wuwpga:9710003

Note: Type of Document - Postscript; pages: 40 ; figures: included
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Web page: http://129.3.20.41

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Related research
Keywords: Information evaluation monitoring endogenous adverse selection budgeting incomplete contracts rent seeking

Find related papers by JEL classification:
C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
M4 - Business Administration and Business Economics; Marketing; Accounting - - Accounting

References listed on IDEAS
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  1. Cremer, Jacques & Khalil, Fahad, 1994. "Gathering information before the contract is offered: The case with two states of nature," European Economic Review, Elsevier, vol. 38(3-4), pages 675-682, April. [Downloadable!] (restricted)
  2. Mookherjee, D. & Reichelstein, S., 1996. "Budgeting and Hierarchical Control," Papers 71, Boston University - Industry Studies Programme.
    Other versions:
  3. Cremer, J. & Khalil, F & Rochet, J.-C., 1996. "Strategic Information Gathering Before a Contract is Offered," Papers 976.425, Toulouse - GREMAQ.
    Other versions:
  4. Schmidt, Klaus M, 1996. "The Costs and Benefits of Privatization: An Incomplete Contracts Approach," Journal of Law, Economics and Organization, Oxford University Press, vol. 12(1), pages 1-24, April.
  5. Lewis, Tracy R & Sappington, David E M, 1997. "Information Management in Incentive Problems," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 796-821, August.
  6. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-59, April. [Downloadable!] (restricted)
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  7. Lewis Tracy R. & Sappington David E. M., 1993. "Ignorance in Agency Problems," Journal of Economic Theory, Elsevier, vol. 61(1), pages 169-183, October. [Downloadable!] (restricted)
  8. Dewatripont, Mathias, 1988. "Commitment through Renegotiation-Proof Contracts with Third Parties," Review of Economic Studies, Blackwell Publishing, vol. 55(3), pages 377-89, July. [Downloadable!] (restricted)
  9. Cremer, Jacques, 1995. "Arm's Length Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 275-95, May. [Downloadable!] (restricted)
  10. Anke Kessler, 1998. "The Value of Ignorance," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 339-354, Summer. [Downloadable!] (restricted)
  11. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, vol. 86(3), pages 478-501, June. [Downloadable!] (restricted)
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