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A General Model of Coexisting Hidden Action and Hidden Information

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  • Suren Basov
  • Peter Bardsley

Abstract

We consider a general agency model with coexisting hidden action and hidden information. We prove that, with minor technical qualifications, independence of the production technology from the consumer type is necessary and sufficient for welfare irrelevance of hidden action. Our result clarifies and confirms the main conclusion drawn in the existing literature on mixed models, that if the parties are risk neutral and the production technology is not correlated with private information, then hidden action is irrelevant. However it makes it clear that even under risk neutrality this conclusion does not extend to the correlated case, which in practice occurs quite frequently. We illustrate it with a realistic example where neither hidden action nor hidden information on their own lead to welfare losses, while their combination does.

Suggested Citation

  • Suren Basov & Peter Bardsley, 2005. "A General Model of Coexisting Hidden Action and Hidden Information," Department of Economics - Working Papers Series 958, The University of Melbourne.
    • Handle: RePEc:mlb:wpaper:958
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    File URL: http://www.economics.unimelb.edu.au/downloads/wpapers-05/958.pdf
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    References listed on IDEAS

    as
    1. Guesnerie, Roger & Picard, Pierre & Rey, Patrick, 1989. "Adverse selection and moral hazard with risk neutral agents," European Economic Review, Elsevier, vol. 33(4), pages 807-823, April.
    2. Melumad, Nahum D. & Reichelstein, Stefan, 1989. "Value of communication in agencies," Journal of Economic Theory, Elsevier, vol. 47(2), pages 334-368, April.
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    Cited by:

    1. Meng, Dawen & Tian, Guoqiang, 2013. "Multi-task incentive contract and performance measurement with multidimensional types," Games and Economic Behavior, Elsevier, vol. 77(1), pages 377-404.
    2. David Rietzke & Yu Chen, 2020. "Push or pull? Performance‐pay, incentives, and information," RAND Journal of Economics, RAND Corporation, vol. 51(1), pages 301-317, March.
    3. Suren Basov, 2006. "Non-monotone Incentives in a Model of Coexisting Hidden Action and Hidden Information," Department of Economics - Working Papers Series 979, The University of Melbourne.
    4. Suren Basov & Svetlana Danilkina, 2010. "Multitasking, Multidimensional Screening, and Moral Hazard with Risk Neutral Agents," The Economic Record, The Economic Society of Australia, vol. 86(s1), pages 80-86, September.

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    More about this item

    Keywords

    hidden action; hidden information; Fredholmintegral equations of the first type.;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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