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Optimal contracting with private information on cost expectation and variability

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  • Danau, Daniel
  • Vinellay, Annalisa

Abstract

We study the screening problem that arises in a framework where, initially, the agent is privately informed about both the expected production cost and the cost variability and, at a later stage, he learns privately the cost realization. The speci c set of relevant incentive constraints, and so the characteristics of the optimal mechanism, depend nely upon the curvature of the principal s marginal surplus function as well as the relative importance of the two initial information problems. Pooling of production levels is optimally induced with respect to the cost variability when the principal's knowledge imperfection about the latter is sufficiently less important than that about the expected cost.

Suggested Citation

  • Danau, Daniel & Vinellay, Annalisa, 2010. "Optimal contracting with private information on cost expectation and variability," SIRE Discussion Papers 2010-59, Scottish Institute for Research in Economics (SIRE).
    • Handle: RePEc:edn:sirdps:195
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    File URL: http://hdl.handle.net/10943/195
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    References listed on IDEAS

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