A Revelation Mechanism for Soft Information under Moral Hazard |
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| Authors: | GUILLAUME ROGER |
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| Affiliation: | The University of Sydney |
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| Abstract: | This paper constructs a revelation mechanism to address a problem of moral hazard under soft information. The agent alone observes the stochastic outcome of her action, which she reports to the principal. Therefore the principal also faces a problem of ex post adverse selection. Economically relevant restrictions induce constraints on the principal's choice of mechanism and the Revelation Principle fails to apply. Specifically, a direct mechanism induces some pooling, which does not replicate the allocation obtained using a larger message space. Pooling also weakens the ex ante incentives. The Revelation Principle is extended to obtain type separation. A better audit relaxes frictions. |
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