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American Economic Journal: Microeconomics: Vol. 5 No. 4 (November 2013)

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Optimal Contract under Moral Hazard with Soft Information

Article Citation

Roger, Guillaume. 2013. "Optimal Contract under Moral Hazard with Soft Information." American Economic Journal: Microeconomics, 5(4): 55-80.

DOI: 10.1257/mic.5.4.55

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. This affects the shape and properties of the optimal contract, which fails to elicit truthful revelation in all states. In this setup audit and transfer become strategic complements; this is rooted in the nonseparability of the problem.

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Authors

Roger, Guillaume (U Sydney)

JEL Classifications

D82: Asymmetric and Private Information; Mechanism Design
D86: Economics of Contract: Theory

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