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Moral Hazard with Discrete Soft Information
Author(s) -
Roger Guillaume
Publication year - 2013
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/1475-4932.12074
Subject(s) - moral hazard , adverse selection , principal (computer security) , information asymmetry , audit , actuarial science , schedule , outcome (game theory) , microeconomics , economics , complete information , business , computer science , incentive , computer security , management
I study a model of moral hazard with soft information. The risk‐averse agent takes an action and she alone observes the stochastic outcome; hence the principal faces a problem of ex post adverse selection as well. With limited instruments, the principal cannot solve these two problems independently. To elicit ex post information revelation, he must use an audit mechanism and distort the transfer schedule, as compared to the standard moral hazard problem. This is socially costly in that these transfer distortions imply effort distortions. These results are robust and suggest high‐power contracts may have to be revisited when information is soft.