Strategic transmission of information and short-term commitment

Summary. We examine the strategic role of information transmission in a repeated principal-agent relationship where the agent produces information that is useful to the principal. The agent values continuous employment for the principal because he makes a relationship-specific investment that can yield rents to him when the relationship is renewed. Assuming that the parties are sufficiently impatient, we show that full disclosure of the information produced occurs early in the relationship when the principal can commit to a long-term relationship, when the agent observes his valuation of continuous employment after making a report on information produced, or when the agent obtains a low valuation of continuous employment before making a report. By contrast, a strategic delay in the transmission of information occurs when the principal can only commit to a short-term relationship and the agent obtains a high valuation of continuous employment before making a report. Received: October 15, 1997; revised version: July 27, 1998     

On the optimality of privacy in sequential contracting

This paper studies the exchange of information between two principals who contract sequentially with the same agent, as in the case of a buyer who purchases from multiple sellers. We show that when (a) the upstream principal is not personally interested in the downstream level of trade, (b) the agent's valuations are positively correlated, and (c) preferences in the downstream relationship are separable, then it is optimal for the upstream principal to offer the agent full privacy. On the contrary, when any of these conditions is violated, there exist preferences for which disclosure is strictly optimal, even if the downstream principal does not pay for the information. We also examine the effects of disclosure on welfare and show that it does not necessarily reduce the agent's surplus in the two relationships and in some cases may even yield a Pareto improvement.     

The Economics of Clear Advice and Extreme Options

I study a principal–agent model in which the agent collects information and then chooses a verifiable action. I show that the principal can find it desirable to constrain the agent's action set even though there is no disagreement about the ranking of actions ex post . The elimination or penalization of „intermediate” actions, which are optimal when information is poor, improves incentives for information collection. I characterize optimal action sets when the agent is infinitely risk averse with respect to income shocks and optimal incentive schemes when the agent is risk neutral.     

Why it Pays to Conceal: On the Optimal Timing of Acquiring Verifiable Information

Abstract. We consider optimal contracts when a principal has two sources to detect bad projects. The first one is an information technology without agency costs (IT_P), whereas the second one is the expertise of an agent subject to moral hazard, adverse selection and limited liability (IT_A). First, we show that the principal does not necessarily benefit from access to additional information and thereby may prefer to ignore it. Second, we discuss different timings of information release, i.e., a disclosure contract offered to the agent after the principal announced the result of IT_P , and a concealment contract where the agent exerts effort before IT_P is checked. We find that concealment is superior whenever the quality of IT_P is sufficiently low. Then, IT_P is almost worthless under a disclosure contract, while it can still be exploited to reduce the agent's information rent under concealment. If the quality of IT_P improves, disclosure can be superior as it allows to adjust the agent's effort to the updated expected quality of the project. However, even for a highly informative IT_P , concealment can be superior as it mitigates the adverse selection problem.     

Modelling countervailing incentives in adverse selection models: A synthesis

This paper is concerned with countervailing incentives in the adverse selection problems that typically arise in principal-agent relationships when the agent has private information. These incentives are present when the agent is tempted to either overstate or understate his private information depending upon the specific realization of his type. These problems were first analyzed by Lewis and Sappington (1989) and have been characterized and extended by Maggi and Rodríguez-Clare (1995a) and Jullien (2000). In this paper we propose a simple method of characterizing countervailing incentives in which the key element is the analysis of the properties of the full information problem. Our method for solving the principal problem, once identified the presence of countervailing incentives, follows closely the Baron’s (1989) approach, which does not require using optimal control theory. The methodology we present can be easily applied to many different economic settings. For example, in health economics, an insurer (or a hospital manager) might act as a principal and a physician as an agent. In labor settings, an employer may play the role of principal and a worker may act as the agent. In regulated industries, the regulatory agency might act as a principal designing incentive schemes for firms (the agents). In environmental regulation or resource exploitation, the principal might be an international agency dealing with national governments or firms.     

The value of information in a principal-agent model with moral hazard: The ex post contracting case

In a principal-agent model with moral hazard, a signal about the principal?s technology — the stochastic mapping from the agent?s action to the outcome — is observed before the contract is offered. The signal is either uninformative (null information), informative and observed only by the principal (private information), or also observed by the agent (public information). We show that, from an ex ante standpoint (before the signal is observed): (i) the agent prefers private to both null and public information; (ii) the principal sometimes prefers null to both private and public information; and (iii) when the principal prefers public to null information, she prefers public to private information, whereas the agent prefers private to public information. In this last situation, we also show that (iv) for any separating equilibrium with private information, there exists a contract with public information that both strictly prefer.     

Game for Information Disclosure and the Auditing Institution

This paper takes Principal-agent Theory as the basic analysis flame to analyze the modern corporate principal and agent in a state of the two sides in asymmetric information on the basis of self-interest maximization, and the game strategy which revolves the information disclosure and hideaway to launch, and therefore can get the game way which causes the auditing institution. The equilibrium in game of the information disclosure causes the auditing institution, the expense and cost which the audit profession consumes is the company governs reduces the information not asymmetrical diligently center essential agency costs.     

Reputation versus information: The delegation policy when the principal has reputational concerns

We analyze the delegation policy when the principal has reputational concerns. Both the principal and the agent can be either good or biased; the good players prefer the correct decision, while the biased ones prefer a high action even though it may be wrong. An evaluator who forms the principal's reputation may or may not be able to observe who makes the decision. When the evaluator cannot observe the allocation of authority, the principal shares the credit and blame with the agent. Although delegation can improve the quality of decision making because the agent has better information, it may also hurt the good principal's reputation because the high action may be taken by the biased agent while the blame will be shared when it is wrong. Thus, the good principal has a tendency to keep too much authority to maintain her reputation. By contrast, when the evaluator can observe the allocation of authority, delegation becomes a signaling device for the good type of principal to differentiate herself from the biased one. This results in an excessive allocation of authority toward the agent.     

Contract renegotiation and options in agency problems

This article discusses the ability of an agent and a principalto achieve the first-best outcome when the agent invests inan asset that has greater value if owned by the principal thanby the agent. When contracts can be renegotiated, a well-knowndanger is that the principal can hold up the agent, underminingthe agent's investment incentives. We begin by identifying acountervailing effect: Investment by the agent can increasehis value for the asset, thus improving his bargaining positionin renegotiation. We show that option contracts will achievethe first best whenever his threat-point effect dominates theholdup effect. Otherwise, achieving the first best is difficultand, in many cases, impossible.     

Collusion, Delegation and Supervision with Soft Information

This paper shows that supervision with soft information is valuable whenever supervisors and supervisees collude under asymmetric information and proceeds then to derive an Equivalence Principle between organizational forms of supervisory and productive activities. We consider an organization with an agent privately informed on his productivity and a risk averse supervisor getting signals on the agent's type. In a centralized organization, the principal can communicate and contract with both the supervisor and the agent. However, these two agents can collude against the principal. In a decentralized organization, the principal only communicates and contracts with the supervisor who in turn sub-contracts with the agent. We show that the two organizations achieve the same outcome. We discuss this equivalence and provide various comparative statics results to assess the efficiency of supervisory structures.     

CAREER CONCERNS,MATCHING, AND OPTIMAL DISCLOSURE POLICY*

Raiders may suffer from information disadvantage since the current employer is often better informed about his workers' quality. When workers have career concerns and matching influences productivity, the initial employer can strategically disclose information to influence incentives and matching efficiency. Long‐term complete contracts induce full disclosure when raiders are perfectly competitive. The optimal short‐term contract induces full disclosure if raiders are perfectly competitive, and the workers are risk neutral and are not liquidity constrained. These conditions are not only sufficient but also “almost necessary” for full disclosure. Partial disclosure may be optimal if any of these conditions is relaxed.     

Multistage Contracting with Applications to R&D and Insurance Policies

An agent undertakes a nonobservable first‐stage effort. The principal observes whether the effort results in a successful project or not. If the project succeeds, only the firm observes its interim quality, and can further improve it with a nonobservable second‐stage effort. If the agent accepts penalties when the first‐stage fails, moral hazard and asymmetric information do not prevent the principal from implementing her first‐best outcome. However, if the agent is bounded by the maximum loss he can bear when the first‐stage fails (limited liability), the principal induces the agent to exert a first‐stage effort below the first‐best level and a second‐stage effort above the first‐best level when the interim quality of his project is low. This distortion in efforts implies that the ex post rent left to the agent with a project of high interim quality is above the first‐best level. This provides a rationale for the optimality of expanding the use of the “carrot” (second‐stage rent) when the use of the “stick” (first‐stage penalty) is restricted. Implications of the theory for R&D, bank, job, and insurance contracts are discussed.     

Asymmetric awareness and moral hazard

This paper introduces asymmetric awareness into the classical principal–agent model and discusses the optimal contract between a fully aware principal and an unaware agent. The principal enlarges the agentʼs awareness strategically when proposing a contract and faces a tradeoff between participation and incentives. Leaving the agent unaware allows the principal to exploit the agentʼs incomplete understanding of the world, relaxing the participation constraint, while making the agent aware enables the principal to use the revealed contingencies as signals about the agentʼs action choice, relaxing the incentive constraint. The optimal contract reveals contingencies that have low probability but are highly informative about the agentʼs effort.     

When vagueness induces indirect competition: strategic incompleteness of contracts

Summary. A class of employment contracts entailing production targets and consequent rewards is studied. In a nondiscriminatory environment, a principal hiring many agents faces the problem of writing a common contract which induces the highest possible effort from each one of his agents. While a very high target may get the best out of highly skilled agents, low skilled ones tend to shirk. On the other hand, although low targets make every agent put positive effort, there are efficiency losses from the high skilled agents. Also, in such environments the principal often has better information regarding the skills of all his agents than what each agent has regarding the rest of the agents at work. We show that if skills of agents are sufficiently close, the informed principal earns strictly higher profits by offering incomplete contracts as against being specific, as incomplete contracts reduce flow of information and induce indirect competition amongst agents. Received: May 19, 2000; revised version: August 28, 2001     

Informed principal with correlation

In this paper we analyze an adverse selection model with one principal and one agent, who are both risk neutral and have private information. We assume that the private information of the principal is correlated with that of the agent. The main result of the paper is that the principal can extract a larger share of the surplus from the agent than in the case where her information is public. The principal can design such a contract because she exploits the fact that her type is an informative signal on the agent's one. We fully characterize the equilibrium of the game in which different types of principal offer the same menu of contracts that leaves the agent uninformed about the principal's type. This gives more freedom to the principal when setting the transfers because the agent's constraints need to hold only at an interim stage.     

GRANTING AN EXIT OPTION TO CONDUCT AN AUDIT

We study a principal–agent relationship with auditing in which information from an audit is ‘soft’– by conducting an audit, the principal observes the agent's private information, but cannot obtain verifiable evidence on the information. Moreover, the principal's auditing effort is unverifiable in our model. Therefore, besides the agent's misreporting incentive, there is the principal's incentive to accuse the truthful agent even without auditing. If the principal's auditing effort is verifiable, granting no exit option to the agent is optimal although the principal can still accuse a truthful agent after the audit. We show that when the principal's auditing effort is unverifiable, granting an exit option to the agent and auditing are complementary. Without granting an exit option to the agent, no auditing is optimal, and the principal grants an exit option to conduct a sincere audit, which in turn mitigates the agent's misreporting incentive. Our analysis also reveals that, when the cost of auditing is sufficiently large, the principal conducts more sincere audits with a smaller amount of penalty.     

Incentive Contracts and Environmental Performance Indicators

A principal-agent (P-A) model is used to analyse the effect of environmentaldiligence, the principal (top management), having to use imperfectperformance indicators and fearing penalties for environmental damages,wants to avoid environmental harm and induce the agent (employeemanipulating hazardous materials) to take appropriate action. To motivatethe agent, the principal offers an incentive contract based onenvironmental stewardship performance (as measured by EPI).Environmental stewardship being difficult to measure, due to high levelsof uncertainty surrounding, EPI, creates impediments to the establishmentof an efficient P-A contract.     

WHY DOES IT MATTER THAT BELIEFS AND VALUATIONS BE CORRECTLY REPRESENTED?*

This article contains an analysis of a simple principal–agent problem illustrating possible problems that may arise when the prinicpal ascribes to the agent subjective probabilities and utilities that are implied by the subjective expected utility model but do not represent the agent's beliefs and valuations. In particular, it is possible that an incentive contract designed by the principal induces the agent to choose an action that is not in the principal's best interest.     

上市公司自愿性信息披露行为有效吗?-基于1998-2003年中国证券市场的检验

该文运用经济主体行为最优化与信息经济学方法,对新兴市场中上市公司自愿性信息披露行为动因及其披露机制进行分析,研究信息占优的上市公司经理层如何选择自愿性信息披露行为.在不完全信息条件下论证上市公司分别采取信息公开、分离策略或信息掩饰策略,进行完全性信息披露、部分性信息披露、信息非披露,从而实现公司价值的均衡过程.为验证自愿性信息披露行为的有效性程度,论文构建了中国上市公司自愿性信息披露指数(VDI),并对1998-2003年上市公司自愿性信息披露行为有效性进行实证研究.检验结果表明:(1)中国上市公司的VDI逐年提高;(2)规模大、效益好的上市公司,更倾向于实施自愿性信息披露;(3)公司治理指标对VDI的解释效果并不显著;(4)具有外资股的上市公司自愿性信息披露动机明显较强.     

Adverse selection and bilateral asymmetric information

A simple principal-agent model with bilateral asymmetric information and common values is developed. The agent(s) has private information about his characteristics but does not knowhow these affect outcomes. The principal knows how the characteristics translate into outcomes, but does not observe the characteristics. It is shown that equilibrium contracts aresimple in being designednot to reveal the agent's characteristics. When the agent knows howsome of his characteristics affect the outcome, contracts will be differentiated with respect to precisely those characteristics. An application to the use of genetic information is considered.