On the Interplay of Hidden Action and Hidden Information in Simple Bilateral Trading Problems

Patrick Schmitz

MPRA Paper from University Library of Munich, Germany

Abstract: A buyer and a seller can exchange one unit of an indivisible good. While producing the good, the seller can exert unobservable effort (hidden action). Then the buyer realizes whether his valuation is high or low, which stochastically depends upon the seller's effort level (hidden information). The parties are risk neutral, they can rule out renegotiation and write complete contracts. It is shown that the first best cannot be achieved whenever the ex post efficient trade decision is trivial. The second-best contract is characterized and an application of the model to the choice of risky projects is briefly discussed.

Keywords: Hidden Action; Hidden Information; Hold-up Problem (search for similar items in EconPapers)
JEL-codes: D23 D82 (search for similar items in EconPapers)
Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

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Journal Article: On the Interplay of Hidden Action and Hidden Information in Simple Bilateral Trading Problems (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:12531

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