 Limited liability, the first-order approach, and the ranking of information systems in agenciesFrancois Larmande Economics Letters, 2013, vol. 118, issue 2, 314-317 Abstract: Kim (1995) provides a sufficient condition to rank information systems when the first-order approach is valid. The basis for the condition is the comparison of the likelihood ratio distributions. I show, first, that Kim’s criterion is not necessary when the limited liability of the agent binds. I derive, in the binomial model, a less restrictive necessary and sufficient condition. This new criterion compares the likelihood ratios, but only for the high outcome. It also compares the marginal productivities of effort. In contrast, when the limited liability does not bind, I find that Kim’s criterion is necessary and sufficient in the binomial model. Second, when the first-order approach is not valid, I show that Kim’s criterion is no longer sufficient: the principal might be better off with a less informative (in Kim’s sense) monitoring technology. Keywords: Moral hazard; Likelihood ratio distribution; Mean preserving spread criterion; Limited liability; First-order approach (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:118:y:2013:i:2:p:314-317 DOI: 10.1016/j.econlet.2012.11.008 Access Statistics for this article Economics Letters is currently edited by Economics Letters Editorial Office More articles in Economics Letters from Elsevier |
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