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Asymmetric information and the termination of contracts in agencies

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  • NAHUM D. MELUMAD

Abstract

. I consider an agency model in which an agent, having acquired private post†contract predecision information, is allowed to breach the contract by paying the principal predetermined damages. The relationship of this model to the standard no†breach agency model is demonstrated and I argue that simplifying the analysis by restricting attention to no†breach models may yield incorrect conclusions. The shape of an optimal breach contract is then discussed and it is demonstrated that an optimal contract cannot include a severance payment. Next, I consider an alternative contractual arrangement whereby the agent may purchase access to private information prior to contracting. In this case, all the advantages of the breach institution are maintained, while possible exogenous (legal) restrictions on damage payments are avoided. The paper concludes by suggesting implications the study may have for legal research on contracts and judicial systems. Résumé. L'auteur étudie un modèle de relation de mandataire dans lequel le mandataire, ayant acquis de l'information privée après la signature du contrat et avant la prise de décision, est en droit de mettre fin au contrat en réglant au mandant les dommages établis au préalable. L'auteur démontre la relation entre ce modèle et le modèle standard sans convention de rupture et soutient que le fait de simplifier l'analyse en se bornant à étudier les modèles sans convention de rupture peut mener à des conclusions inexactes. La forme du contrat optimal comportant une convention de rupture est ensuite traitée et l'auteur démontre qu'un contrat optimal ne peut inclure d'indemnité de rupture. Il analyse ensuite une disposition contractuelle de rechange selon laquelle le mandataire peut acheter l'accès à de l'information privée avant de s'engager. Dans ce cas, tous les avantages de la convention de rupture sont maintenus, alors que les restrictions exogènes (légales) possibles relativement au règlement de dommages sont évitées. L'auteur conclut en donnant une idée des conséquences que pourrait avoir cette étude pour la recherche en droit portant sur les contrats et les systèmes judiciaires.

Suggested Citation

  • Nahum D. Melumad, 1989. "Asymmetric information and the termination of contracts in agencies," Contemporary Accounting Research, John Wiley & Sons, vol. 5(2), pages 733-753, March.
    • Handle: RePEc:wly:coacre:v:5:y:1989:i:2:p:733-753
    DOI: 10.1111/j.1911-3846.1989.tb00736.x
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    References listed on IDEAS

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    Cited by:

    1. Joseph Bachar, 1989. "Auditing quality, signaling, and underwriting contracts," Contemporary Accounting Research, John Wiley & Sons, vol. 6(1), pages 216-241, September.

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