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Informed principal, moral hazard, and limited liability

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  • Teddy Mekonnen

    (Brown University)

Abstract

I consider a moral hazard problem with risk neutral parties, limited liability, and an informed principal. The contractible outcome is correlated to both the principal’s private information and the agent’s hidden action. In contrast to a model without a privately informed principal or without limited liability, I show that the first-best payoff cannot be implemented by any equilibrium mechanism.

Suggested Citation

  • Teddy Mekonnen, 2021. "Informed principal, moral hazard, and limited liability," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 9(1), pages 119-142, April.
  • Handle: RePEc:spr:etbull:v:9:y:2021:i:1:d:10.1007_s40505-021-00201-3
    DOI: 10.1007/s40505-021-00201-3
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    References listed on IDEAS

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    1. Wagner, Christoph & Mylovanov, Tymofiy & Tröger, Thomas, 2015. "Informed-principal problem with moral hazard, risk neutrality, and no limited liability," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 280-289.
    2. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-1797, November.
    3. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    4. Mylovanov, Timofiy & Troger, Thomas E., 2012. "Informed principal problems in generalized private values environments," Theoretical Economics, Econometric Society, vol. 7(3), September.
    5. 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.
    6. Karle, Heiko & Schumacher, Heiner & Staat, Christian, 2016. "Signaling quality with increased incentives," European Economic Review, Elsevier, vol. 85(C), pages 8-21.
    7. Beaudry, Paul, 1994. "Why an Informed Principal May Leave Rents to an Agent," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 821-832, November.
    8. Inderst, Roman, 2001. "Incentive schemes as a signaling device," Journal of Economic Behavior & Organization, Elsevier, vol. 44(4), pages 455-465, April.
    9. Tymofiy Mylovanov & Thomas Tröger, 2014. "Mechanism Design by an Informed Principal: Private Values with Transferable Utility," Review of Economic Studies, Oxford University Press, vol. 81(4), pages 1668-1707.
    10. 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.
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    Citations

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    Cited by:

    1. Andreas Haupt & Zoe Hitzig, 2023. "Opaque Contracts," Papers 2301.13404, arXiv.org.
    2. Andriy Zapechelnyuk, 2023. "On the equivalence of information design by uninformed and informed principals," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(4), pages 1051-1067, November.
    3. Frédéric Koessler & Vasiliki Skreta, 2022. "Informed Information Design," PSE Working Papers halshs-03107866, HAL.

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    More about this item

    Keywords

    Informed principal; Limited liability; Surplus extraction;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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