Transparency in agency: The constant elasticity case and extensions

• Published in: International journal of industrial organization 2014-03, Vol.33, p.9-21
• Main Author: Marino, Anthony M.
• Format: Article
• Language: English
• Subjects: Agency theory; Disclosure; Economic information; Economic theory; Elasticity; Elasticity of substitution; Hidden economy; Information; Information management; Motivation; Non-disclosure; Productivity; Studies; Utility functions
• ISSN: 0167-7187; 1873-7986
• DOI: 10.1016/j.ijindorg.2013.12.002

This paper considers a hidden action agency problem where the principal has a single source of hidden information concerning the agent's utility, the agent's effort productivity, or the agent's cost of effort. We examine whether the principal should precommit to disclosing these different single sources of information to the agent. If the optimal contract is invariant over the hidden information and, thus, the disclosure rules (constant elasticity case), such disclosure increases the agent's utility, it can raise or lower profit and total surplus depending on the source of hidden information, and non-disclosure can be optimal if disclosure affects the agent's motivation. If the contract varies with the hidden information and, thus, disclosure rule, disclosure or non-disclosure can be optimal depending on whether the party's payoff is convex or concave in the information variable, respectively. •A principal has hidden information on the agent's utility, productivity, or cost.•We ask if the principal should disclose each information type to the agent.•Disclosure or non-disclosure can be optimal depending on payoff curvatures.