Informed Principal, Moral Hazard, and the Value of a More Informative Technology

Hector Chade and Randy Silvers

Working Papers from Department of Economics, W. P. Carey School of Business, Arizona State University

Abstract: We analyze a principal-agent model with moral hazard in which the principal has private information about the technology, and the contract offered by her may signal this information to the agent. We characterize Perfect Bayesian Equilibria of the game that possess the following properties that do not arise in its complete information counterpart: first, a principal with a more informative technology ends up earning less profits than a principal with a less informative one; second, compared to the complete information case, the actions implemented by the privately informed principal can be distorted, and the distortion can even be in an upward direction (i.e., a higher action is implemented under incomplete information); third, the agent can end up being better off when the principal has private information.

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Journal Article: Informed principal, moral hazard, and the value of a more informative technology (2002)
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