Optimal contract under moral hazard with soft information

Guillaume Roger

No 2012-12, Discussion Papers from School of Economics, The University of New South Wales

Abstract: I study a model of moral hazard with soft information: the agent alone observes the stochastic outcome of her action; hence the principal faces a problem of ex post adverse selection. With limited instruments the principal cannot solve these two problems independently; the ex post incentive for misreporting interacts with the ex ante incentives for effort. The optimal transfer is option-like, the contract leaves the agent with some ex ante rent and fails to elicit truthful revelation in all states. Audit and transfer co-vary positively, which likely is a forgotten component of many real-life contracts.

Keywords: moral hazard; asymmetric information; soft information; contract; mechanism; audit. (search for similar items in EconPapers)
JEL-codes: D82 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2011-10
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Related works:
Journal Article: Optimal Contract under Moral Hazard with Soft Information (2013)
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