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Optimal contracts with privately informed agents and active principals

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  • García, Diego

Abstract

This paper considers an optimal contracting problem between an informed risk-averse agent and a principal, when the agent needs to perform multiple tasks, and the principal is active, namely she can influence some aspect of the agency relationship on top of the contract itself (i.e. capital budgets, task assignments). The paper shows how asymmetric information makes incentives and investment decisions substitutes for the principal. This result yields novel implications for contracting models with moral hazard and asymmetric information, i.e., capital budgeting or external capital raising games.

Suggested Citation

  • García, Diego, 2014. "Optimal contracts with privately informed agents and active principals," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 695-709.
    • Handle: RePEc:eee:corfin:v:29:y:2014:i:c:p:695-709
    DOI: 10.1016/j.jcorpfin.2013.12.010
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    More about this item

    Keywords

    Mechanism design; Multi-task agency; Action restrictions; Active principal; Capital budgeting;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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