Informed Principal, Moral Hazard, and Limited Liability

28 Pages Posted: 11 Dec 2017 Last revised: 24 Dec 2020

Date Written: July 8, 2018

Abstract

I consider a moral hazard problem with risk neutral parties, limited liability, and an informed principal. The contractible outcome is correlated to both the principal's private information and the agent's hidden action. In contrast to a model without a privately informed principal or without limited liability, I show that the first-best payoff cannot be implemented by any equilibrium mechanism.

Keywords: Informed principal, limited liability, moral hazard

JEL Classification: D82, D86

Suggested Citation

Mekonnen, Teddy, Informed Principal, Moral Hazard, and Limited Liability (July 8, 2018). Available at SSRN: https://ssrn.com/abstract=3083159 or http://dx.doi.org/10.2139/ssrn.3083159

Teddy Mekonnen (Contact Author)

Brown University ( email )

64 Waterman St
Providence, RI 02912-9029
United States

HOME PAGE: http://sites.google.com/view/teddymekonnen/

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