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The Value of Information in a Principal-Agent Model with Moral Hazard: The Ex Ante Contracting Case

We examine a principal-agent model with moral hazard in which the technology – the vector of probability distributions from the agent’s actions to the possible outcomes – is initially unknown. A signal correlated with the technology is observed after the principal and agent agree to the contract (ex ante contracting). The signal may be uninformative (null information) or informative and observed only by the principal (private information) or observed by both the principal and agent (public information). We show that: (i) if the principal implements different actions for each signal with private information, then the principal strictly prefers both public to private information and private to null information; (ii) if the principal implements the same action for either signal with public information, then the principal is indifferent between null and private information, which she prefers to public information; (iii) the value of information can be non-monotonic both with private and with public information; and (iv) the value of information may be greater either with private or with public information.

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File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2006_23.pdf
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Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Economics Series with number 2006_23.

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Date of creation: 28 Jul 2006
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Handle: RePEc:dkn:econwp:eco_2006_23
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  1. Shannon, Chris, 1995. "Weak and Strong Monotone Comparative Statics," Economic Theory, Springer, vol. 5(2), pages 209-27, March.
  2. Kim, Son Ku, 1995. "Efficiency of an Information System in an Agency Model," Econometrica, Econometric Society, vol. 63(1), pages 89-102, January.
  3. Chade, Hector & Silvers, Randy, 2002. "Informed principal, moral hazard, and the value of a more informative technology," Economics Letters, Elsevier, vol. 74(3), pages 291-300, February.
  4. Cardon, James H & Hendel, Igal, 2001. "Asymmetric Information in Health Insurance: Evidence from the National Medical Expenditure Survey," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 408-27, Autumn.
  5. Georges Dionne & Christian Gourieroux & Charles Vanasse, 2001. "Testing for Evidence of Adverse Selection in the Automobile Insurance Market: A Comment," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 444-473, April.
  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. Inderst, Roman, 1998. "Incentives Schemes as a Signaling Device," Sonderforschungsbereich 504 Publications 98-36, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  8. Igal Hendel & Alessandro Lizzeri, 2000. "The Role of Commitment in Dynamic Contracts: Evidence from Life Insurance," NBER Working Papers 7470, National Bureau of Economic Research, Inc.
  9. Diamond, Peter A. & Stiglitz, Joseph E., 1974. "Increases in risk and in risk aversion," Journal of Economic Theory, Elsevier, vol. 8(3), pages 337-360, July.
  10. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
  11. Mezzetti, Claudio & Tsoulouhas, Theofanis, 2000. "Gathering information before signing a contract with a privately informed principal," International Journal of Industrial Organization, Elsevier, vol. 18(4), pages 667-689, May.
  12. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  13. Roger B. Myerson, 1981. "Mechanism Design by an Informed Principal," Discussion Papers 481, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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