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When should principals acquire verifiable information?

  • Feess,Eberhard
  • Schieble,Michael
  • Markus,Walzl

    (METEOR)

We analyze a principal-agent model in which a principal has two possibilities to improve his knowledge about the quality of an investment project. First, he has access to an informationtechnology that provides a \textit{verifiable}, unbiased signal. Second, he can hire an agent who detects bad projects with some probability depending on his unobservable effort, and who reports his findings opportunistically. We analyze whether the principal should check the signal before or after he offers a contract. The first policy has the advantage that the agent''s effort can be adjusted to the signal, whereas the second policy allows areduction in the agent''s rent. We show that checking the signal afterwards is always superior if the signal is sufficiently uninformative.

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Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 049.

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Date of creation: 2004
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Handle: RePEc:unm:umamet:2004049
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  1. Beaudry, Paul, 1994. "Why an Informed Principal May Leave Rents to an Agent," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 821-32, November.
  2. Michela Cella, 2006. "Informed Principal with Correlation," Economics Series Working Papers 261, University of Oxford, Department of Economics.
  3. Lewis, Tracy R & Sappington, David E M, 1997. "Information Management in Incentive Problems," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 796-821, August.
  4. Feess, Eberhard & Walzl, Markus, 2004. "Delegated expertise--when are good projects bad news?," Economics Letters, Elsevier, vol. 82(1), pages 77-82, January.
  5. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
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