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Informed principal with correlation

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  • Cella, Michela

Abstract

In this paper we analyze an adverse selection model with one principal and one agent, who are both risk neutral and have private information. We assume that the private information of the principal is correlated with that of the agent. The main result of the paper is that the principal can extract a larger share of the surplus from the agent than in the case where her information is public. The principal can design such a contract because she exploits the fact that her type is an informative signal on the agent's one. We fully characterize the equilibrium of the game in which different types of principal offer the same menu of contracts that leaves the agent uninformed about the principal's type. This gives more freedom to the principal when setting the transfers because the agent's constraints need to hold only at an interim stage.

Suggested Citation

  • Cella, Michela, 2008. "Informed principal with correlation," Games and Economic Behavior, Elsevier, vol. 64(2), pages 433-456, November.
    • Handle: RePEc:eee:gamebe:v:64:y:2008:i:2:p:433-456
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    References listed on IDEAS

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    Cited by:

    1. Tröger, Thomas & Mylovanov, Timofiy, 2012. "Mechanism design by an informed principal: the quasi-linear private-values case," Working Papers 12-14, University of Mannheim, Department of Economics.
    2. Vasiliki Skreta, 2011. "On the informed seller problem: optimal information disclosure," Review of Economic Design, Springer;Society for Economic Design, vol. 15(1), pages 1-36, March.
    3. Anastasios Dosis, 2022. "On the informed principal model with common values," RAND Journal of Economics, RAND Corporation, vol. 53(4), pages 792-825, December.
    4. Fleckinger, Pierre, 2007. "Informed principal and countervailing incentives," Economics Letters, Elsevier, vol. 94(2), pages 240-244, February.
    5. Takeshi Nishimura, 2019. "Informed Principal Problems in Bilateral Trading," Papers 1906.10311, arXiv.org, revised Feb 2022.
    6. Mylovanov, Timofiy & Troger, Thomas E., 2012. "Informed principal problems in generalized private values environments," Theoretical Economics, Econometric Society, vol. 7(3), September.
    7. Pierre Fleckinger, 2007. "Informed Principal and Countervailing Incentives," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00607075, HAL.
    8. Michela Cella, 2005. "Risky allocations from a risk-neutral informed principal," Review of Economic Design, Springer;Society for Economic Design, vol. 9(3), pages 191-202, August.
    9. Nishimura, Takeshi, 2022. "Informed principal problems in bilateral trading," Journal of Economic Theory, Elsevier, vol. 204(C).
    10. Bedard, Nicholas C., 2017. "The strategically ignorant principal," Games and Economic Behavior, Elsevier, vol. 102(C), pages 548-561.
    11. Jansen, T.L. & van Lier, A. & van Witteloostuijn, A., 2004. "Strategic delegation in oligopoly : the market share case," Research Memorandum 049, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    12. Balkenborg, Dieter & Makris, Miltiadis, 2015. "An undominated mechanism for a class of informed principal problems with common values," Journal of Economic Theory, Elsevier, vol. 157(C), pages 918-958.
    13. Xun Bian & Justin C. Contat & Bennie D. Waller & Scott A. Wentland, 2023. "Why Disclose Less Information? Toward Resolving a Disclosure Puzzle in the Housing Market," The Journal of Real Estate Finance and Economics, Springer, vol. 66(2), pages 443-486, February.
    14. Davoodalhosseini, Seyed Mohammadreza, 2019. "Constrained efficiency with adverse selection and directed search," Journal of Economic Theory, Elsevier, vol. 183(C), pages 568-593.
    15. Cho, Wonjoo & Blandford, David, 2015. "Bilateral information asymmetry and irreversible practice adoption through agri-environmental policy: an application to peat land retirement in Norway," 89th Annual Conference, April 13-15, 2015, Warwick University, Coventry, UK 204212, Agricultural Economics Society.

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