IDEAS home Printed from https://ideas.repec.org/a/eee/ecolet/v118y2013i2p314-317.html
   My bibliography  Save this article

Limited liability, the first-order approach, and the ranking of information systems in agencies

Author

Listed:
  • Larmande, Francois

Abstract

Kim (1995) provides a sufficient condition to rank information systems when the first-order approach is valid. The basis for the condition is the comparison of the likelihood ratio distributions. I show, first, that Kim’s criterion is not necessary when the limited liability of the agent binds. I derive, in the binomial model, a less restrictive necessary and sufficient condition. This new criterion compares the likelihood ratios, but only for the high outcome. It also compares the marginal productivities of effort. In contrast, when the limited liability does not bind, I find that Kim’s criterion is necessary and sufficient in the binomial model. Second, when the first-order approach is not valid, I show that Kim’s criterion is no longer sufficient: the principal might be better off with a less informative (in Kim’s sense) monitoring technology.

Suggested Citation

  • Larmande, Francois, 2013. "Limited liability, the first-order approach, and the ranking of information systems in agencies," Economics Letters, Elsevier, vol. 118(2), pages 314-317.
    • Handle: RePEc:eee:ecolet:v:118:y:2013:i:2:p:314-317
    DOI: 10.1016/j.econlet.2012.11.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165176512005988
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econlet.2012.11.008?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Frøystein Gjesdal, 1982. "Information and Incentives: The Agency Information Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(3), pages 373-390.
    2. Kim, Son Ku, 1995. "Efficiency of an Information System in an Agency Model," Econometrica, Econometric Society, vol. 63(1), pages 89-102, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. François Larmande & Jean-Pierre Ponssard, 2013. "Fishing for excuses and performance evaluation," Working Papers hal-00825297, HAL.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nafziger, Julia, 2009. "Timing of information in agency problems with hidden actions," Journal of Mathematical Economics, Elsevier, vol. 45(11), pages 751-766, December.
    2. Florian Hoffmann & Roman Inderst & Marcus Opp, 2021. "Only Time Will Tell: A Theory of Deferred Compensation [Motivating Innovation in Newly Public Firms]," Review of Economic Studies, Oxford University Press, vol. 88(3), pages 1253-1278.
    3. Silvers, Randy, 2012. "The value of information in a principal–agent model with moral hazard: The ex post contracting case," Games and Economic Behavior, Elsevier, vol. 74(1), pages 352-365.
    4. Gerten, Elisa & Beckmann, Michael & Kräkel, Matthias, 2022. "Information and Communication Technology, Hierarchy, and Job Design," IZA Discussion Papers 15491, Institute of Labor Economics (IZA).
    5. Marie-Cécile Fagart & Bernard Sinclair-Desgagné, 2002. "Auditing Policies and Information Systems in Principal-Agent Analysis," CIRANO Working Papers 2002s-18, CIRANO.
    6. Fabian Herweg & Daniel Muller & Philipp Weinschenk, 2010. "Binary Payment Schemes: Moral Hazard and Loss Aversion," American Economic Review, American Economic Association, vol. 100(5), pages 2451-2477, December.
    7. Chi, Chang Koo & Olsen, Trond E., 2018. "Relational Incentive Contracts and Performance Measurement," Discussion Papers 2018/6, Norwegian School of Economics, Department of Business and Management Science.
    8. Budde, Jörg, 2009. "Information in tournaments under limited liability," Journal of Mathematical Economics, Elsevier, vol. 45(1-2), pages 59-72, January.
    9. Chaigneau, Pierre & Edmans, Alex & Gottlieb, Daniel, 2019. "The informativeness principle without the first-order approach," Games and Economic Behavior, Elsevier, vol. 113(C), pages 743-755.
    10. Kräkel, Matthias, 2021. "On the delegation of authority," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 965-981.
    11. Herweg, Fabian & Müller, Daniel, 2008. "The Optimality of Simple Contracts: Moral Hazard and Loss Aversion," Bonn Econ Discussion Papers 17/2008, University of Bonn, Bonn Graduate School of Economics (BGSE).
    12. Chen, Bo, 2012. "All-or-nothing payments," Journal of Mathematical Economics, Elsevier, vol. 48(3), pages 133-142.
    13. Lilia Filipova, 2007. "Monitoring and Privacy in Automobile Insurance Markets with Moral Hazard," Discussion Paper Series 293, Universitaet Augsburg, Institute for Economics.
    14. Budde, Jörg, 2005. "Information in tournaments under limited liability," Bonn Econ Discussion Papers 21/2005, University of Bonn, Bonn Graduate School of Economics (BGSE).
    15. Lilia Filipova, 2007. "Monitoring and Privacy in Automobile Insurance Markets with Moral Hazard," Working Papers 026, Bavarian Graduate Program in Economics (BGPE).
    16. Lorens A. Imhof & Matthias Kräkel, 2023. "Team Diversity and Incentives," Management Science, INFORMS, vol. 69(4), pages 2497-2516, April.
    17. Christensen, Peter O. & Feltham, Gerald A. & Sabac, Florin, 2005. "A contracting perspective on earnings quality," Journal of Accounting and Economics, Elsevier, vol. 39(2), pages 265-294, June.
    18. Peter-J. Jost, 2023. "Auditing versus monitoring and the role of commitment," Review of Accounting Studies, Springer, vol. 28(2), pages 463-496, June.
    19. Guillaume Plantin & Jean Tirole, 2018. "Marking to Market versus Taking to Market," American Economic Review, American Economic Association, vol. 108(8), pages 2246-2276, August.
    20. Ohad Kadan & Philip J. Reny & Jeroen M. Swinkels, 2017. "Existence of Optimal Mechanisms in Principal‐Agent Problems," Econometrica, Econometric Society, vol. 85, pages 769-823, May.

    More about this item

    Keywords

    Moral hazard; Likelihood ratio distribution; Mean preserving spread criterion; Limited liability; First-order approach;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolet:v:118:y:2013:i:2:p:314-317. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ecolet .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.