A note on optimal contracting with public ex post information under limited liability
Daniel Danau () and
Annalisa Vinella ()
Post-Print from HAL
Riordan and Sappington (J Econ Theory 45:189–199, 1988) show that in an agency relationship in which the agent's type is correlated with a public ex post signal, the principal may attain first best (full surplus extraction and efficient output levels) if the agent is faced with a lottery such that each type is rewarded for one signal realization and punished equally for all the others. Gary-Bobo and Spiegel (RAND J Econ 37:431–448, 2006) show that there exist locally incentive compatible lotteries such that limited liability constraints are satisfied, only if these constraints are satisfied when that kind of lottery is used. We explore how lotteries should be designed to attain not only local but also global incentive compatibility when the agent is protected by limited liability. The main issue with global incentive compatibility rests with intermediate types being potentially attractive reports to both lower and higher types. A lottery including three levels of profit (rather than only two) is found to be optimal under limited liability, in that it is most likely to be globally incentive compatible, if local incentive constraints are strictly satisfied. Conditions for first-best implementation are identified.
Keywords: Informative signals; Limited liability; Incentive compatibility (search for similar items in EconPapers)
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-02138605
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Published in International Journal of Game Theory, Springer Verlag, inPress, pp.online first. ⟨10.1007/s00182-019-00674-4⟩
There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.
Journal Article: A note on optimal contracting with public ex post information under limited liability (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-02138605
Access Statistics for this paper
More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().