Contractual Design with Correlated Information Under Limited Liability

Dominique Demougin () and Devon Garvie

No 815, Working Paper from Economics Department, Queen's University

Abstract: We examine contractual design in a principal-agent model under two forms of limited liability: non-negative constraints on the transfer payments to and the profits of the agent. We show that when limited liability is a binding constraint the principal cannot implement the first-best solution and the agent earns rents from private information. Limited liability is a binding constraint in the non-negative transfers model only when a signal is insufficiently responsive to type (inelastic). Further, as the production rule and profits are continuous in the type elasticity of the signal density function, the level of inefficiency is less than that which obtains with no signal. If a signal is sufficiently responsive to type (elastic) in this environment, then the principal can implement the first-best allocation and the value of the agent's private information is zero.

Pages: 29 pages
Date: 1991-05
References: Add references at CitEc
Citations: View citations in EconPapers (48)

Downloads: (external link)
http://qed.econ.queensu.ca/working_papers/papers/qed_wp_815.pdf First version 1991 (application/pdf)

Related works:
Journal Article: Contractual Design with Correlated Information under Limited Liability (1991)
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: https://EconPapers.repec.org/RePEc:qed:wpaper:815

Access Statistics for this paper

More papers in Working Paper from Economics Department, Queen's University Contact information at EDIRC.
Bibliographic data for series maintained by Mark Babcock ().