Hidden Action or Hidden Information? How Information Gathering Shapes Contract Design

39 Pages Posted: 17 Jul 2013

See all articles by Elisabetta Iossa

Elisabetta Iossa

University of Rome Tor Vergata; IEFE Bocconi University

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 2013

Abstract

A risk averse agent gathers information on productivity shocks and produces accordingly on behalf of his principal. Information gathering is imperfect so that the agent has either complete or no knowledge at all of those shocks. The model allows for moral hazard in information gathering, private information on productivity shocks and moral hazard on operating effort. Two polar scenarios of the agency literature with either pure hidden action (the agent exerts operating effort not knowing yet the realization of the shock) or pure hidden information (the agent knows that shock when exerting operating effort) arise endogenously with positive probability. An optimal menu of linear contracts mixes high-powered, productivity-dependent screening options following “good news” with a fixed low-powered option that solves a pure moral hazard problem otherwise.

Keywords: hidden action, hidden information, Incentive mechanisms, information gathering

JEL Classification: D82, H41

Suggested Citation

Iossa, Elisabetta and Martimort, David, Hidden Action or Hidden Information? How Information Gathering Shapes Contract Design (July 2013). CEPR Discussion Paper No. DP9552. Available at SSRN: https://ssrn.com/abstract=2294811

Elisabetta Iossa (Contact Author)

University of Rome Tor Vergata ( email )

Via Columbia n.2
Rome, 00133
Italy

IEFE Bocconi University ( email )

Via Roentgen 1
Milan, Milan 20136
Italy

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 5 6112 8614 (Phone)
+33 5 6112 8637 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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