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Optimal contract under moral hazard with soft information

Author

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  • Guillaume Roger

    (School of Economics, The University of New South Wales)

Abstract

I study a model of moral hazard with soft information: the agent alone observes the stochastic outcome of her action; hence the principal faces a problem of ex post adverse selection. With limited instruments the principal cannot solve these two problems independently; the ex post incentive for misreporting interacts with the ex ante incentives for effort. The optimal transfer is option-like, the contract leaves the agent with some ex ante rent and fails to elicit truthful revelation in all states. Audit and transfer co-vary positively, which likely is a forgotten component of many real-life contracts.

Suggested Citation

  • Guillaume Roger, 2011. "Optimal contract under moral hazard with soft information," Discussion Papers 2012-12, School of Economics, The University of New South Wales.
    • Handle: RePEc:swe:wpaper:2012-12
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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2012-12.pdf
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    References listed on IDEAS

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    2. Keeyoung Rhee, 2021. "Optimal Contracts under Moral Hazard and Costly Lying," Korean Economic Review, Korean Economic Association, vol. 37, pages 115-140.
    3. Shalpegin, Timofey, 2020. "Collaborative product development: Managing supplier incentives for key component testing," European Journal of Operational Research, Elsevier, vol. 285(2), pages 553-565.
    4. Guillaume Roger, 2016. "A Revelation Mechanism for Soft Information under Moral Hazard," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 18(5), pages 752-763, October.
    5. Versano, Tsahi, 2021. "Silence can be golden: On the value of allowing managers to keep silent when information is soft," Journal of Accounting and Economics, Elsevier, vol. 71(2).
    6. Guillaume Roger, 2013. "Moral Hazard with Discrete Soft Information," The Economic Record, The Economic Society of Australia, vol. 89(287), pages 545-555, December.

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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