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Contracting for Information under Imperfect Commitment

Author

Listed:
  • Vijay Krishna

    (Department of Economics, Penn State University)

  • John Morgan

    (Haas School of Business & Department of Economics, University of California, Berkeley)

Abstract

Organizational theory suggests that authority should lie in the hands of those with information, yet the power to transfer authority is rarely absolute in practice. We investigate the validity and application of this advice in a model of optimal contracting between an uninformed principal and informed agent where the principal's commitment power is imperfect. We show that while full alignment of interests combined with delegation of authority is feasible, it is never optimal. The optimal contract is 'bang-bang'---in one region of the state space, full alignment takes place, in the other, no alignment takes place. We then compare these contracts to those in which the principal has full commitment power as well as to several 'informal' institutional arrangements.

Suggested Citation

  • Vijay Krishna & John Morgan, 2005. "Contracting for Information under Imperfect Commitment," Microeconomics 0504006, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpmi:0504006
    Note: Type of Document - pdf; pages: 38
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    References listed on IDEAS

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    More about this item

    Keywords

    Imperfect commitment; optimal contracting; delegation;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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