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Moral Hazard with Soft Information

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  • Guillaume Roger

    (School of Economics, The University of New South Wales)

Abstract

We study a model of moral hazard with soft information: the risk-averse agent takes an action and she alone observes the stochastic outcome; hence the principal faces a problem of ex post adverse selection. High-power contracts may not be appropriate when information is soft. The optimal truth-telling mechanism with audit requires a two-part tariff to be offered to the agent. The fixed component affords the agent a constant ex post information rent, which weakens the ex ante incentives for effort. We then establish an equivalence between a truthful mechanism and the general mechanism, for the agent’s payoff set and action choice. For the principal a truth-telling mechanism strictly dominates because it shields the agent from variations in the ex post payoffs. In that sense the optimal contract is unique.

Suggested Citation

  • Guillaume Roger, 2010. "Moral Hazard with Soft Information," Discussion Papers 2010-26, School of Economics, The University of New South Wales.
    • Handle: RePEc:swe:wpaper:2010-26
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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2010-26.pdf
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    Cited by:

    1. Guillaume Roger, 2013. "Optimal Contract under Moral Hazard with Soft Information," American Economic Journal: Microeconomics, American Economic Association, vol. 5(4), pages 55-80, November.

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