Transparency

Abstract

This paper considers a simple hidden action agency problem where the principal has hidden information concerning the agent's utility of cash flow or cash flow, the agent's effort productivity, or the agent's cost of effort. The question is whether the principal should precommit to disclosing these different sources or types of information to the agent. Such single source disclosure always increases the agent's utility. If the hidden information emanates from effort productivity or effort cost, disclosure also increases the firm's profit. If information emanates from the single source of utility/cash flow, non-disclosure can raise profit and total surplus, when the production circumstances satisfy conditions on effort cost and effort productivity. Under these conditions, non-disclosure can also be optimal if disclosure affects the agent's motivation.

Keywords: Disclosure

JEL Classification: L2