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Optimal Contracting in Agency with Verifiable Ex Post Information

Author

Listed:
  • Kessler, Anke
  • Lülfesmann, Christoph
  • Schmitz, Patrick W

Abstract

The Paper studies a straightforward adverse selection problem in which an informative but imperfect signal on the agent’s type becomes public ex post. The agent is protected by limited liability, which rules out unboundedly high penalties. Analysing the consequences of the additional information and the corresponding extension of the space of feasible contracts, the following conclusions emerge. First, the qualitative effects of the signal can be unambiguously tied to the nature of the underlying problem (e.g., whether the agent is in a ‘buyer’ or a ‘seller’ position). Second, the joint surplus of the relationship may well fall, i.e., the distortions due to informational asymmetries can become more pronounced although more information is now available. Finally, the agent may benefit from releasing additional signals because of an associated increase in expected informational rents.

Suggested Citation

  • Kessler, Anke & Lülfesmann, Christoph & Schmitz, Patrick W, 2002. "Optimal Contracting in Agency with Verifiable Ex Post Information," CEPR Discussion Papers 3428, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3428
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    References listed on IDEAS

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    Keywords

    adverse selection; ex post information; limited liability;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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