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Information Acquisition and the Equilibrium Incentive Problem
Author(s) -
Su Alice PengJu
Publication year - 2016
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/jems.12175
Subject(s) - adverse selection , moral hazard , incentive , principal (computer security) , debt , microeconomics , information asymmetry , principal–agent problem , equity (law) , business , economics , contract theory , private information retrieval , actuarial science , finance , computer science , computer security , corporate governance , political science , law
I study the optimal incentive provision in a principal–agent relationship with costly information acquisition by the agent. I emphasize that adverse selection or moral hazard is the principal's endogenous choice by inducing or deterring information acquisition. The principal designs the contract not only to address an existing incentive problem but also to implement its presence. Implementation of adverse selection relies on a steeper information rent to the agent than the standard menu, such that the agent is motivated to distinguish the efficient state of nature from the inefficient. Moral hazard is implemented by replacing the benchmark debt contract with a debt‐with‐equity‐share contract, such that the agent does not attempt to acquire information to either avoid debt or to extract rent.