Randomization in contracts with endogenous information

Stefan Terstiege

No 07/2011, Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE)

Abstract: I consider a situation, where the agent can acquire payoff-relevant information either before or after the contract is signed. To raise efficiency, the principal might solicit information; to retain all surplus, however, she must prevent precontractual information gathering. The following class of stochastic contracts may solve this trade-off optimally: before signing, information acquisition is not solicited, and afterwards randomly. The key insight is that randomization makes precontractual information costlier for the agent.

Keywords: Information acquisition; Principal-agent; Mechanism design; Randomization (search for similar items in EconPapers)
JEL-codes: D82 D83 (search for similar items in EconPapers)
Date: 2011
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