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

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Abstract

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.

Suggested Citation

  • Randy Silvers, 2006. "The Value of Information in a Principal-Agent Model with Moral Hazard: The Ex Ante Contracting Case," Economics Series 2006_23, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  • Handle: RePEc:dkn:econwp:eco_2006_23
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    File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2006_23.pdf
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    More about this item

    Keywords

    Moral Hazard; Ex Ante Contracting; Informed Principal; Technology; Value of Information;

    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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