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Multiple Signals, Statistical Sufficiency, and Pareto Orderings of Best Agency Contracts

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  • Amin H. Amershi
  • John S. Hughes

Abstract

In this study we identify necessary and sufficient conditions for sufficient statistics to strictly (Pareto) dominate all nonsufficient statistics as information for contracting in agencies with moral hazard. We first observe that strict dominance requires that an optimal compensation scheme itself be a sufficient statistic. Since this can occur only in settings where the family of distributions parameterized by the agent's hidden effort admits one-dimensional sufficient statistics, strict dominance is the exceptional case. Nevertheless, we are able to show that there exists a substantial class of distributions, containing many well-known families, for which strict dominance does obtain.

Suggested Citation

  • Amin H. Amershi & John S. Hughes, 1989. "Multiple Signals, Statistical Sufficiency, and Pareto Orderings of Best Agency Contracts," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 102-112, Spring.
  • Handle: RePEc:rje:randje:v:20:y:1989:i:spring:p:102-112
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    Cited by:

    1. Pierre Chaigneau & Alex Edmans & Daniel Gottlieb, 2014. "The Generalized Informativeness Principle," NBER Working Papers 20729, National Bureau of Economic Research, Inc.
    2. Budde, Jörg, 2005. "Information in tournaments under limited liability," Bonn Econ Discussion Papers 21/2005, University of Bonn, Bonn Graduate School of Economics (BGSE).
    3. Budde, Jörg, 2009. "Information in tournaments under limited liability," Journal of Mathematical Economics, Elsevier, vol. 45(1-2), pages 59-72, January.
    4. Schnedler Wendelin, 2011. "You Don’t Always Get What You Pay For: Bonuses, Perceived Income and Effort," German Economic Review, De Gruyter, vol. 12(1), pages 1-10, February.
    5. John Christensen & Joel Demski, 1995. "Project selection and audited accrual measurement in a multi-task setting," European Accounting Review, Taylor & Francis Journals, vol. 4(3), pages 405-432.
    6. Alex Gershkov & Jianpei Li & Paul Schweinzer, 2009. "Efficient tournaments within teams," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 103-119, March.
    7. Amin H. Amershi & Peter Cheng, 1989. "On the demand for historical events recording and maintenance of audit trails," Contemporary Accounting Research, John Wiley & Sons, vol. 6(1), pages 72-90, September.
    8. 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.
    9. Junwook Yoo & Igor Semenenko, 2021. "Performance measure aggregation – two action levels," Economics Bulletin, AccessEcon, vol. 41(2), pages 564-572.
    10. Göx, Robert F. & Hemmer, Thomas, 2020. "On the relation between managerial power and CEO pay," Journal of Accounting and Economics, Elsevier, vol. 69(2).

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