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Optimal contract under moral hazard with soft information


  • Guillaume Roger

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


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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    References listed on IDEAS

    1. Dilip Mookherjee & Ivan Png, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 399-415.
    2. Araujo, Aloisio & Moreira, Humberto, 2001. "A general Lagrangian approach for non-concave moral hazard problems," Journal of Mathematical Economics, Elsevier, vol. 35(1), pages 17-39, February.
    3. Steven D. Levitt & Christopher M. Snyder, 1997. "Is No. News Bad News? Information Transmission and the Role of "Early Warning" in the Principal-Agent Model," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 641-661, Winter.
    4. Guillaume Roger, 2010. "Moral Hazard with Soft Information," Discussion Papers 2010-26, School of Economics, The University of New South Wales.
    5. Daniel Krähmer & Roland Strausz, 2011. "Optimal Procurement Contracts with Pre-Project Planning," Review of Economic Studies, Oxford University Press, vol. 78(3), pages 1015-1041.
    6. John R. Conlon, 2009. "Two New Conditions Supporting the First-Order Approach to Multisignal Principal-Agent Problems," Econometrica, Econometric Society, vol. 77(1), pages 249-278, January.
    7. Jonathan C. Glover & Anil Arya & Shyam NMI Sunder, 1999. "Earnings Management and the Revelation Principle," Yale School of Management Working Papers ysm120, Yale School of Management.
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    Cited by:

    1. 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.
    2. Guillaume Roger, 2013. "Moral Hazard with Discrete Soft Information," The Economic Record, The Economic Society of Australia, vol. 89(287), pages 545-555, December.

    More about this item


    moral hazard; asymmetric information; soft information; contract; mechanism; audit.;

    JEL classification:

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


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