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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.

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Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 64 (2008)
Issue (Month): 2 (November)
Pages: 433-456

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Handle: RePEc:eee:gamebe:v:64:y:2008:i:2:p:433-456
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622836

Keywords: Informed principal Private values Correlation;

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Find related papers by JEL classification:
  • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
  • D20 - Microeconomics - - Production and Organizations - - - General
  • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

References listed on IDEAS
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  1. Roger B. Myerson, 1981. "Mechanism Design by an Informed Principal," Discussion Papers 481, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
  3. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November.
  4. Strausz, Roland, 2006. "Deterministic versus stochastic mechanisms in principal-agent models," Journal of Economic Theory, Elsevier, vol. 128(1), pages 306-314, May.
  5. Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-61, March.
  6. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
  7. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
  8. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
  9. Riordan, Michael H. & Sappington, David E. M., 1988. "Optimal contracts with public ex post information," Journal of Economic Theory, Elsevier, vol. 45(1), pages 189-199, June.
  10. Eric Maskin & Kevin W.S. Roberts, 2006. "On the Fundamental Theorems of General Equilibrium," Economics Working Papers 0074, Institute for Advanced Study, School of Social Science.
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Cited by:

  1. Mylovanov, Timofiy & Tröger, Thomas, 2012. "Informed principal problems in generalized private values environments," Theoretical Economics, Econometric Society, vol. 7(3), September.
  2. Vasiliki Skreta, 2007. "On the Informed Seller Problem: Optimal Information Disclosure," Levine's Bibliography 843644000000000222, UCLA Department of Economics.
  3. Michela Cella, 2005. "Risky Allocations from a Risk-Neutral Informed Principal," Economics Series Working Papers 234, University of Oxford, Department of Economics.
  4. Thomas Tröger & Tymofiy Mylovanov, 2008. "Optimal Auction Design and Irrelevance of Private Information," Bonn Econ Discussion Papers bgse21_2008, University of Bonn, Germany.
  5. Pierre Fleckinger, 2007. "Informed Principal and Countervailing Incentives," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00607075, HAL.
  6. Feess,Eberhard & Schieble,Michael & Markus,Walzl, 2004. "When should principals acquire verifiable information?," Research Memorandum 049, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  7. Mylovanov, Tymofiy & Tröger, Thomas, 2013. "Mechanism Design by an Informed Principal: The Quasi-Linear Private-Values Case," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 437, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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