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Contracting for information: on the effects of the principal's outside option

Author

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  • Franck Bien

    (LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Thomas Lanzi

    (Department of Strategy, Entrepreneurship and Economics - SKEMA Business School)

Abstract

We study optimal contracting in a communication setting in which an uninformed principal has the opportunity to undertake an outside option if an informed agent refuses the contract. The contract specifies a decision rule and a transfer for each unit of information revealed by the agent. Due to the existence of the outside option, the informational rent isnonmonotonic, and we characterize the properties of the optimal contract. We show that the outside option becomes a credible threat for the agent because it allows the principal to punish him severely with negative transfers. Moreover, we compare our optimal contract to the one under perfect commitment without an outside option developed by Krishna and Morgan [2008]. We find that regardless of the divergence of preferences between the principal andthe agent, the contract with an outside option is always better for the principal. Moreover, we show that the threat of using an outside option increases information extraction.

Suggested Citation

  • Franck Bien & Thomas Lanzi, 2017. "Contracting for information: on the effects of the principal's outside option," Working Papers hal-01491912, HAL.
    • Handle: RePEc:hal:wpaper:hal-01491912
    Note: View the original document on HAL open archive server: https://hal.science/hal-01491912v1
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    References listed on IDEAS

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    1. Vijay Krishna & John Morgan, 2008. "Contracting for information under imperfect commitment," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 905-925, December.
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