Economics at your fingertips  

A note on optimal contracting with public ex post information under limited liability

Daniel Danau () and Annalisa Vinella ()

Post-Print from HAL

Abstract: 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)
Date: 2019
Note: View the original document on HAL open archive server:
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, first. ⟨10.1007/s00182-019-00674-4⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: A note on optimal contracting with public ex post information under limited liability (2020) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1007/s00182-019-00674-4

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().

Page updated 2021-10-09
Handle: RePEc:hal:journl:halshs-02138605