A General Model of Coexisting Hidden Action and Hidden Information
We consider a general agency model with coexisting hidden action and hidden information. We prove that, with minor technical qualifications, independence of the production technology from the consumer type is necessary and sufficient for welfare irrelevance of hidden action. Our result clarifies and confirms the main conclusion drawn in the existing literature on mixed models, that if the parties are risk neutral and the production technology is not correlated with private information, then hidden action is irrelevant. However it makes it clear that even under risk neutrality this conclusion does not extend to the correlated case, which in practice occurs quite frequently. We illustrate it with a realistic example where neither hidden action nor hidden information on their own lead to welfare losses, while their combination does.
|Date of creation:||2005|
|Date of revision:|
|Contact details of provider:|| Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia|
Phone: +61 3 8344 5355
Fax: +61 3 8344 6899
Web page: http://fbe.unimelb.edu.au/economics
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Guesnerie Roger & Picard Pierre & Rey P, 1986.
"Adverse selection and moral hazard with risk-neutral agent,"
CEPREMAP Working Papers (Couverture Orange)
- Guesnerie, Roger & Picard, Pierre & Rey, Patrick, 1989. "Adverse selection and moral hazard with risk neutral agents," European Economic Review, Elsevier, vol. 33(4), pages 807-823, April.
- Picard, Pierre, 1987.
"On the design of incentive schemes under moral hazard and adverse selection,"
Journal of Public Economics,
Elsevier, vol. 33(3), pages 305-331, August.
- Picard Pierre, 1986. "On the design of incentive schemes under moral hazard and adverse selection," CEPREMAP Working Papers (Couverture Orange) 8602, CEPREMAP.
- Melumad, Nahum D. & Reichelstein, Stefan, 1989. "Value of communication in agencies," Journal of Economic Theory, Elsevier, vol. 47(2), pages 334-368, April.
When requesting a correction, please mention this item's handle: RePEc:mlb:wpaper:958. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Katherine Perez)
If references are entirely missing, you can add them using this form.