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Optimal contract under moral hazard with soft information

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  • Guillaume Roger

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

Abstract

I study a model of moral hazard with soft information: the agent alone observes the stochastic outcome of her action; hence the principal faces a problem of ex post adverse selection. With limited instruments the principal cannot solve these two problems independently; the ex post incentive for misreporting interacts with the ex ante incentives for effort. The optimal transfer is option-like, the contract leaves the agent with some ex ante rent and fails to elicit truthful revelation in all states. Audit and transfer co-vary positively, which likely is a forgotten component of many real-life contracts.

Suggested Citation

  • Guillaume Roger, 2011. "Optimal contract under moral hazard with soft information," Discussion Papers 2012-12, School of Economics, The University of New South Wales.
    • Handle: RePEc:swe:wpaper:2012-12
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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2012-12.pdf
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    References listed on IDEAS

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    Cited by:

    1. Guillaume Roger, 2016. "A Revelation Mechanism for Soft Information under Moral Hazard," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 18(5), pages 752-763, October.
    2. Keeyoung Rhee, 2021. "Optimal Contracts under Moral Hazard and Costly Lying," Korean Economic Review, Korean Economic Association, vol. 37, pages 115-140.
    3. Shalpegin, Timofey, 2020. "Collaborative product development: Managing supplier incentives for key component testing," European Journal of Operational Research, Elsevier, vol. 285(2), pages 553-565.
    4. Guillaume Roger, 2013. "Moral Hazard with Discrete Soft Information," The Economic Record, The Economic Society of Australia, vol. 89(287), pages 545-555, December.
    5. Versano, Tsahi, 2021. "Silence can be golden: On the value of allowing managers to keep silent when information is soft," Journal of Accounting and Economics, Elsevier, vol. 71(2).

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    More about this item

    Keywords

    moral hazard; asymmetric information; soft information; contract; mechanism; audit.;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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