Information Asymmetry: Hidden Information

Jaeyoung Sung
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Jaeyoung Sung: Ajou University

Chapter Chapter 15 in Contract Theory: Discrete- and Continuous-Time Models, 2023, pp 261-272 from Springer

Abstract: Abstract We study a hidden information model where the agent makes not only hidden action, but also hidden project selection decisions. We show that the optimal contract is affected by not only the well-known outcome risk, but also a hidden information risk as well. As a result, the compensation-risk premium consists of two parts: the usual outcome-risk-sharing premium and a hidden-parameter-risk-sharing premium. Moreover, we argue that managers of high (low) risk firms can appear to overreact (underreact) to hidden news about the quality of project opportunities because they optimally invest more (less) aggressively to good news and more (less) conservatively to bad news than they would do were the news and their project decisions to be public.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-981-99-5487-2_15

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DOI: 10.1007/978-981-99-5487-2_15

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