Informed-principal problem with moral hazard, risk neutrality, and no limited liability

We consider a principal–agent moral-hazard problem with risk-neutral parties and no limited liability in which the principal has private information. The principal's private information creates signaling considerations that may distort the implemented outcome. These distortions can explain, e.g...

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Bibliographic Details
Published in:Journal of economic theory 2015-09, Vol.159, p.280-289
Main Authors: Wagner, Christoph, Mylovanov, Tymofiy, Tröger, Thomas
Format: Article
Language:English
Subjects:
Agency theory
Contracts
Distortion
Economic theory
Economics
Efficiency wages
Hazards
Incentives
Information economics
Information management
Information rents
Informed principal
Liability
Mechanism design
Moral hazard
Morality
Risk
Risk assessment
Risk management
Signaling
Studies
Wages
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Summary:We consider a principal–agent moral-hazard problem with risk-neutral parties and no limited liability in which the principal has private information. The principal's private information creates signaling considerations that may distort the implemented outcome. These distortions can explain, e.g., efficiency wages (Beaudry, 1994) and muted incentives (Inderst, 2001). We show that in a large class of environments these distortions vanish if the principal is allowed to offer sufficiently rich contracts.
ISSN:0022-0531
1095-7235
DOI:10.1016/j.jet.2015.05.004