Delegated information acquisition with moral hazard

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

We analyze a principal-agent problem with moral hazard where a principal searches for an opportunity of uncertain return, and hires an agent to evaluate available options. The agent's effort affects the informativeness of a signal about an option's return. Based on the information provided by the agent, the principal decides whether to exercise the option at hand. We derive properties of the optimal contract in both static and dynamic versions of the problem. We show that there are intermediate values of the prior probability that the option is of high quality at which positive effort cannot be sustained. We also show that if the prior is below a threshold, then the agent is rewarded for delivering 'bad news' about the option's quality. We derive distortions (relative to the first best) on the implemented effort level and optimal stopping decision. For some parameter values, it is optimal for the principal to commit to an ex-post suboptimal stochastic decision to exercise an option.

Original languageEnglish (US)
Pages (from-to)55-92
Number of pages38
JournalJournal of Economic Theory
Volume162
DOIs
StatePublished - Mar 1 2016

Fingerprint

Information acquisition
Moral hazard
Exercise
Principal-agent problem
Optimal stopping
Informativeness
News
Optimal contract

Keywords

  • Information acquisition
  • Lotteries
  • Moral hazard
  • Optimal contracts
  • Principal-agent model
  • Search

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

Delegated information acquisition with moral hazard. / Chade, Hector; Kovrijnykh, Natalia.

In: Journal of Economic Theory, Vol. 162, 01.03.2016, p. 55-92.

Research output: Contribution to journalArticle

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