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Moral Hazard and Horizontal Information

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  • Anastasios Papanastasiou

Abstract

This paper examines a moral hazard problem where the principal observes a location signal of the agent's unobserved effort. When the agent incurs costlier effort the demand for the agent's services is ex-ante more spread out over a location measure of demand. If location outcomes are informative about the agents action and verifiable, the principal can improve efficiency by contracting on such information. The introduction of location information suggests that the optimal contract that maximizes expected market size can be locally decreasing in sales when small-market location outcomes are a strong signal of high effort.

Suggested Citation

  • Anastasios Papanastasiou, 2017. "Moral Hazard and Horizontal Information," Department of Economics Working Papers 2017-10, McMaster University.
    • Handle: RePEc:mcm:deptwp:2017-10
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    File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/McMasterEconWP2017-10.pdf
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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