Should Principals Reveal Their Private Information?

Aachen Micro Working Paper No. 4/01

19 Pages Posted: 30 Nov 2001

See all articles by Markus Walzl

Markus Walzl

RWTH Aachen University - Chair for Economics (Microeconomics)

Eberhard Feess

Frankfurt School of Finance & Management gemeinn├╝tzige GmbH

Michael Schieble

Bain & Company - Munich Office

Date Written: September 21, 2001

Abstract

We analyze a principal agent model with hidden action, limited liability and truth-telling constraints under the assumption that the principal has private information. We focus on whether the principal should reveal his private information to the agent. On the one hand, revelation allows to adjust the agent's effort to the best information available. On the other hand, the agent's marginal information rent can be reduced if the principal conceals his private information, because the signal can be exploited as a statistic on the agent's behavior. We show that hiding the signal is superior whenever the good signal is relatively uninformative, or when the agent's effort cost function is sufficiently convex.

Keywords: information revelation, hidden action, limited liability, informed principal

JEL Classification: D82, G21

Suggested Citation

Walzl, Markus and Feess, Eberhard and Schieble, Michael, Should Principals Reveal Their Private Information? (September 21, 2001). Aachen Micro Working Paper No. 4/01. Available at SSRN: https://ssrn.com/abstract=292252 or http://dx.doi.org/10.2139/ssrn.292252

Markus Walzl (Contact Author)

RWTH Aachen University - Chair for Economics (Microeconomics) ( email )

Aachen, 52056
Germany
0049 241 809 6157 (Phone)
0049 241 809 2345 (Fax)

Eberhard Feess

Frankfurt School of Finance & Management gemeinn├╝tzige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Michael Schieble

Bain & Company - Munich Office ( email )

Karlsplatz 1
D-80335 Munich, 02118
Germany

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