Verifiable and Nonverifiable Information in a Two-Period Agency Problem
I examine how a firmâ€™s opportunity to verify information influences the joint use of verifiable and unverifiable information for incentive contracting. I employ a simple two-period agency model, in which contract frictions arise from limited liability and the potential unverifiability of the principalâ€™s information about the agentâ€™s action. With short-term contract, the principal benefits from both a more informative and a more conservative verification of his private information. With long-term contracts, he may prefer a less informative verification, but his preference for a conservative verification persists.
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