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Information Management in Incentive Problems

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  • Lewis, Tracy R
  • Sappington, David E M

Abstract

The authors extend the standard procurement model to examine how an agent is optimally induced to acquire valuable planning information before he chooses an unobservable level of cost-reducing effort. Information acquisition concerns cause important changes in standard incentive contracts. Reward structures with extreme financial payoffs arise and super-high-powered contracts are coupled with contracts that entail pronounced cost sharing. However, if the principal can assign the planning and production tasks to two different agents, then all contracting distortions disappear and, except for forgone economies of scope, the principal achieves her most preferred outcome. Copyright 1997 by the University of Chicago.

Suggested Citation

  • Lewis, Tracy R & Sappington, David E M, 1997. "Information Management in Incentive Problems," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 796-821, August.
  • Handle: RePEc:ucp:jpolec:v:105:y:1997:i:4:p:796-821
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    References listed on IDEAS

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    1. Hermalin, Benjamin E & Katz, Michael L, 1991. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency," Econometrica, Econometric Society, vol. 59(6), pages 1735-1753, November.
    2. Cremer, Jacques & Khalil, Fahad, 1992. "Gathering Information before Signing a Contract," American Economic Review, American Economic Association, pages 566-578.
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    8. Milgrom, Paul & Weber, Robert J., 1982. "The value of information in a sealed-bid auction," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 105-114, June.
    9. Richard J. Gilbert & Michael H. Riordan, 1995. "Regulating Complementary Products: A Comparative Institutional Analysis," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 243-256, Summer.
    10. 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 345-361, March.
    11. Hirao, Yukiko, 1993. "Task Assignment and Agency Structures," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(2), pages 299-323, Summer.
    12. Stole, Lars A, 1992. "The Economics of Liquidated Damage Clauses in Contractual Environments with Private Information," Journal of Law, Economics, and Organization, Oxford University Press, vol. 8(3), pages 582-606, October.
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