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Informed principal with correlation

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  • Michela CELLA

Abstract

In this paper we analyze a simple two-sided adverse selection model with one principaland one agent. They are both risk neutral and have private information about their type. We also assume that the private information of the principal is correlated with the one ofthe agent. The main result of the paper is that the principal can extract a larger share ofthe surplus from the agent than in the case where her information is public. The principalcan design such a contract because she exploits the fact that her type is an informativesignal on the agent’s one. We fully characterize the equilibrium of the principal agent gamein which different types of principal offer the same menu of contracts that leave the agentuninformed about the principal’s type. This gives more freedom to the principal whensetting the transfers because the agent’s constraints need to hold only at an interim stage. The principal gains from a peculiarity of the correlated environment: different types of agenthave different beliefs about the probability distribution over the states of the world.

Suggested Citation

  • Michela CELLA, 2007. "Informed principal with correlation," Departmental Working Papers 2007-11, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    • Handle: RePEc:mil:wpdepa:2007-11
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    References listed on IDEAS

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    6. McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
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    Cited by:

    1. Vasiliki Skreta, 2011. "On the informed seller problem: optimal information disclosure," Review of Economic Design, Springer;Society for Economic Design, vol. 15(1), pages 1-36, March.
    2. Jansen, T.L. & van Lier, A. & van Witteloostuijn, A., 2004. "Strategic delegation in oligopoly : the market share case," Research Memorandum 049, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    3. Mylovanov, Timofiy & Troger, Thomas E., 2012. "Informed principal problems in generalized private values environments," Theoretical Economics, Econometric Society, vol. 7(3), September.
    4. Pierre Fleckinger, 2007. "Informed Principal and Countervailing Incentives," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00607075, HAL.

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    More about this item

    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D20 - Microeconomics - - Production and Organizations - - - General
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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